Court Opinion

ID: 8595355
Source: CourtListenerOpinion
Date Created: 2022-11-23 16:02:29.355725+00
Date Added: 2024-06-11T16:54:53.071505
License: Public Domain

Nichols, Judge,
dissenting:
The dissent in Penn Security Life Insurance Company v. The United States, ante at 594, is to be deemed as being applicable to this case.
FINDINGS OF FACT

History of the Controversy

1. For each of the taxable years 1958 through 1965, plaintiff filed a timely tax return and paid all taxes shown thereon to be due. The taxes paid in said years were as follows:
1958: $48,144.32
1959: $72,405.55
1960: $52,377.05
1961: $17,777.24
1962: $17,047.52
1963: $43,790.32
1964: $17,726.51
Such tax liability of plaintiff in all such years was computed in accord with Section 802 of the Internal Eevenue Code of 1954.
2. Under date of February 20, 1969, the Acting Eegional Commissioner, Internal Eevenue Service, Southeast Eegion, sent plaintiff a notice of deficiencies in federal income taxes in the aggregate amount of $233,762.75, plus interest, for the taxable years ended December 31,1958,1959,1960,1962,1963, and 1964. (Eecomputation for 1961 resulted in a refund due plaintiff.) The statement accompanying said notice of deficiency 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 Eevenue Code of 1954, entitling 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(c) of the 1954 Code certain unearned premiums on accident and health contracts under cer*658tain reinsurance agreements which, should have been included therein. Accordingly, when your total reserves are corrected, your life insurance reserves 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 correct total reserves pursuant to section 801 (a) of the 1954 Code.”
3. 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.
4. On or about October 14, 1969, plaintiff filed with the District Director Claims for Refund 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 Claims for Refund of taxes and interest in the respective amounts and for each of the taxable years as described in paragraph 3 above.
5. 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.
6. Plaintiff filed its Petition in this Court on December 30, 1970, for recovery of income taxes and interest paid by plaintiff with respect to its claims for its taxable years 1958, 1959,1960,1962,1963, and 1964.
7. Jurisdiction over the subject matter of this action is conferred upon this Court under Section 1346(a) (1), Title 28, United States Code.

Bade ground of Controversy

8. Plaintiff was incorporated as a stock insurance company under the Insurance Code of the State of Arizona on June 26,1957.
9. Since its incorporation, all of the outstanding stock of plaintiff has been owned by Southern Discount Company (hereinafter referred to as “Southern Discount”), which was during all years pertinent to this lawsuit a Georgia *659corporation licensed under the consumer finance laws of the states in which it operated, and was engaged in the consumer finance business. These state laws forbade Southern Discount from acting as an insurance company. They did, however, permit Southern Discount to act as an agent for other insurance companies.
10. Prior to the incorporation of plaintiff, Southern Discount acted as agent for various insurance companies who wrote insurance on the lives and health of Southern Discount’s borrowers.
11. Credit life and accident and health insurance is sold in connection with a loan of money or an installment sale of tangible personal property. Credit life insurance, generally defined, is term insurance on the lives of debtors, with their creditors as beneficiaries, in amounts at least sufficient to discharge their indebtedness in case of death. Sometimes the life coverage is combined with 'accident and health coverage. Such coverage pays the debtor’s monthly installments during the period within the policy term in which he is totally disabled unable to work) because of accident or sickness, provided that the disability lasts beyond a minimum or “waiting” period. Coverage may be conditioned upon the permanent as well as total disability of the debtor. When life and accident and health coverage are provided in one contract, the respective premiums are separately stated.
12. As agent in the sale of such insurance, Southern Discount was able to share in its profitability by earning a commission, the amount of which, however, was limited by state law. By causing plaintiff to be formed, Southern Discount was able to participate to a greater degree in the profitability of this business, when it was profitable, by actually engaging in the insurance underwriting function either directly or through its reinsurance.
18. The initial capital and paid-in surplus upon the incorporation of plaintiff in 1957 was $38,000.00. In 1959 plaintiff’s stated capital was increased by $175,000.00 so as to qualify plaintiff to write insurance in the State of Georgia.
14. Plaintiff’s Articles of Incorporation provide, among other powers designated therein, that the nature of the busi*660ness, and objects or purposes to be transacted, promoted or carried on are:
“ (a) To insure, in its own proper and corporate name, tbe lives of persons and all insurance appertaining thereto, including, but not limiting the generality of the foregoing: term, industrial, retirement income, ordinary, modified, single premium, limited payment, group and all other types and forms of contracts of insurance upon or relating to the lives of persons in connection with the extension of credit to such persons.
(b) To reinsure all or a part of any risk, class of risks, or all of the risks of the Company with any other insurance company or companies, and to accept such reinsurance from any other insurance company or companies, as allowed by law.”
15. During all of the taxable years in issue in this case, plaintiff was licensed by the Insurance Commissioner of the State of Arizona to transact life and disability insurance business. During the taxable years in issue the Arizona Department of Insurance conducted regular examinations of plaintiff’s business activities and reports of examination were issued in 1959 and 1963.
16. American Bankers Life Assurance Company (hereinafter referred to as “American Bankers”) is an insurance company licensed to engage in the life and disability insurance business under the laws of the State of Florida.
17. Other than as a party to certain treaties described more particularly below, American Bankers was totally unrelated to plaintiff at its inception and has remained an unrelated company except for its ownership of a nominal amount of stock (approximately 2y2%) i*1 plaintiff’s parent corporation, Southern Discount, from March 15, 1962, until March 25,1969, and approximately 1% acquired in 1972 and disposed of in the following year.
18. Reinsurance is a transaction in which an insurance company (the writing company, or ceding company) transfers, at least temporarily, the responsibility for all or a portion of the claims on which it may eventually be liable under the policies it has written, to another company (the re-insurer) . The ceding company pays the reinsurer consideration for assisting the ceding company in spreading, or *661averaging, its liabilities or risk over time. Reinsurance may be entered into for numerous reasons, including freeing one company’s capital or surplus from restrictions imposed for reserves required, spreading risks over time, avoiding catastrophic losses, the alliance of a small, new company with an older, experienced company for business purposes, sharing profitability of the industry where business considerations require that, and avoiding fluctuations of yearly earnings.
19. During the years 1958 through 1961, plaintiff’s business consisted of reinsuring all policies of insurance against the death or disability of debtors of Southern Discount and certain of its subsidiaries, which insurance policies had been issued by American Bankers. For plaintiff to have written insurance directly, rather than to have acted as a reinsurer, plaintiff would have been required to possess total stated capital and capital surplus of some $400,000.00 at this time in the State of Georgia. Plaintiff’s intent was to act as a reinsurer, permissible with a smaller capital investment, and increase its surplus through the profitability of the business until plaintiff could qualify to write insurance directly. This method of conducting business relieved Southern Discount, plaintiff’s parent company, from the financial burden of contributing to plaintiff’s capital a large amount of cash and thereby enabled Southern Discount to utilize its available cash to produce a more attractive return through its consumer lending business.
20. This reinsurance was effected pursuant to the terms of a reinsurance treaty entered into by the parties and dated June, 1957, which agreement was amended from time to time thereafter. (This period is hereafter referred to as “Period I” and this treaty and its amendments as “Treaty I.” See paragraphs 56-58.)
21. The reinsurance treaties executed by plaintiff and American Bankers were arm’s-length agreements entered into for valid business purposes by unrelated parties.
22. American Bankers realized that if Southern Discount created a subsidiary insurance company which operated alone or under reinsurance treaties with other companies, the insurance business generated by loans on Southern Discount’s *662customers would be lost completely by American Bankers.
23. In 1962, plaintiff having qualified to write insurance directly in the States of North Carolina and Georgia, its primary business became the direct writing of life and accident and health insurance on the debtors of Southern Discount and certain of its subsidiaries. This business continued to be plaintiff’s primary business throughout the remainder of the years in issue (“Period II”), although plaintiff continued to reinsure certain policies under Treaty I until they expired according to their terms.
24. A certain percentage of the accident and health policies written directly by plaintiff during Period II were reinsured by American Bankers pursuant to the terms of a Beinsurance Treaty entered into between the parties on April 18, 1962. (“Treaty II.” See paragraphs 59-61.)
25. Treaty II was entered into by plaintiff and American Bankers in 1962 for valid business reasons. The cession to American Bankers, on an “as written” basis, as described below, of a majority of the credit accident and health insurance which plaintiff wrote meant that plaintiff was not required under state -law to maintain any unearned premium reserves on said insurance. Had full reserves, in the amoimt of 100% of the unearned premiums, been maintained by plaintiff with respect to said insurance, plaintiff’s earnings and the consolidated earnings and capital of Southern Discount would have been adversely affected, with consequent damage to Southern Discount’s borrowing power, which was of great import in its primary business.
26. Treaty II was an arms-length agreement between plaintiff and American Bankers. In addition to its effect on plaintiff’s reserve requirements, Treaty II permitted plaintiff to dilute the effect on its capital and surplus at any given time, of accident and health insurance claims, thus serving the traditional role of reinsurance in deferring risk and providing protection for plaintiff and its customers in the event of any catastrophic loss experience, since American Bankers’ obligations under the treaty were not limited in any way.

Qualification as a Life Insurance Oorrvpany

27. Section 801 of the Internal Bevenue Code of 1954 provides an objective test for determining whether an insur-*663anee company is a “life insurance company” and therefore permitted to report its income in the method prescribed by Section 802. The qualification formula may be expressed in terms of the following fraction, the quotient of which must be more than 50 percent in order for an insurance company to qualify as a life insurance company.
Qualifying reserves (numerator) -h Total reserves (denominator)
1. Tabular reserves on life, annuity, and non-eancellable acei-dent and health policies 1. Tabular reserves on life, annuity, and noncancellable accident and health policies
2. Unearned premiums on non-cancellable life, health, or accident policies not included in (1) 2. Unearned premiums not in-eluded in (1)
3. Unpaid losses on noncancel-lable life, health, or accident policies not included in (1) 3. Unpaid losses not included in (1)
4.All other insurance reserves required by law.
28. Plaintiff did not physically hold, nor did it exercise control over, those unearned premiums representing accident and health insurance reserves which the Commissioner of Internal Eevenue attributed to plaintiff for purposes of measuring plaintiff’s “total reserves.” The accident and health reserves were held by American Bankers and the investment income therefrom received by it.
29. Plaintiff maintained life insurance reserves with respect to life insurance reinsured pursuant to Treaty I. 'Similarly, plaintiff maintained life insurance reserves with respect to life insurance written by plaintiff during Period II.
30. Historically, life insurance reserves are maintained by an insurance company to enable the company to pay those claims which may reasonably be expected to result from the life insurance policies it has issued. The computation of life insurance reserves is based upon mortality tables which contain statistics as to average life expectancies for certain ages and sexes. By applying these statistics to the ages and sexes represented by a company’s actual policyholders, a reasonably accurate prediction of the amount necessary to meet future claims may be made. (Although the amount will vary according to the mix of policyholders for any particular company, the amount of reserves normally required was approximately 40 percent of premiums received for the policies covered by Treaty I.)
*66431. Traditionally, whether because accident and health insurance exposure was initially incapable of being measured statistically (although records have been maintained sufficiently by this time that a reasonable reserve requirement could probably be reached by using statistics), or perhaps because this insurance, unlike life insurance, is usually can-cellable, accident and health reserves are required to be computed in terms of how much of a premium would have to be refunded to a policy holder in the event the policy were cancelled at any particular time during its term. The reserve so maintained is referred to as the “unearned premium reserve.” This method of establishing reserves is the established method of computing reserves for health and accident insurance.
32. All credit life and credit accident and health policies issued by American Bankers and reinsured by plaintiff, and those issued by plaintiff and reinsured by American Bankers, provided for payment of the entire premium at the time of issuance. This is referred to in the industry as “single premium” payment. When a health and accident premium under such a “single premium” policy is first paid by the insured, it is wholly “unearned” in that the entire premium has been paid for coverage over the full term of the policy, which has not yet been provided. Such unearned portion is set aside on the books and records of the company as the unearned premium reserve. As the term of the policy expires with the passage of time, the premium becomes “earned” to the extent of such expiration, since that portion was paid for coverage which was provided during the expired portion of the policy.
33. An unearned premium reserve thus measures an insurance company’s reserve requirements by looking to premiums already paid by policyholders and then determining the portion of such premiums that represent payment for insurance to be provided after the reserve valuation date.
34. In the event that the policies issued by American Bankers or by plaintiff to the debtors, in Period I or II, were cancelled by some act prior to the expiration of their original terms, the refund of the unearned portion of the premiums *665would be made in pursuance to their terms in accordance with a prescribed formula known as the Rule of 78.
35.Under the Rule of 78 or “sum-of-the-digits” method, the unearned premium is computed by applying changing fractions each year (or month, if unearned premiums are determined monthly) to the premium paid by the insured. The numerator of the fraction changes each year (or month) to a number which corresponds to the sum of the digits of the remaining unexpired term (years or months) of the policy, and the denominator, which remains constant, is the sum of all the years’ (or months’) digits corresponding to the entire term of insurance coverage. For example, if an insured debtor paid a $300 premium for disability benefits at the inception of a three-year single premium policy, he would be entitled to a refund under the Rule of 78 of $300 (3+2+1 \ 3lj-~2+l’X^300y ^ the policy was terminated at the beginning of the first year, $ 150T{ was terminated at the beginning of the second year, and $50 (j3-j_2+íX$300^) if the policy was terminated at the beginning of the third year. 2+1 3+2+1 X$300j if the policy
36.The unearned premium reserve for accident 'and health insurance is therefore 100 percent of the 'gross accident and health premium at the outset of a policy term. It is impossible for an insurance company to maintain such a reserve unless it has other funds besides the premium in question, since other costs such as the agent’s commission and administrative expenses must also be paid from the same premium. Even with other funds the restriction on capital imposed by such a reserve requirement is severe.
37.It has become customary in the industry to structure reinsurance treaties (which serve other valid business purposes of leveling the peaks and valleys in a particular company’s liability pattern) in such a way that the larger, high-capital party to the treaty maintains the reserves required for any accident and health insurance involved. Thus the party whose capital can bear the burden of the restriction imposed by “unearned premium reserves” will physically *666bold those reserves and collect the investment income from them.
38. The result of plaintiff’s treaties with American Bankers was that plaintiff was not required to maintain reserves for the accident and health insurance reinsured or written directly by it, to the extent said business was subject to those treaties.
39. In Treaty I, the accident and health insurance written by American Bankers was reinsured by plaintiff on a month-to-month basis, as it became “earned.” The single premium received by American Bankers at the creation of the policy was held by American Bankers and remitted on a monthly basis, net of a 12%% retention, to plaintiff, as payment for the reinsurance being provided to American Bankers. American Bankers maintained the “unearned premium reserves” on said policies; plaintiff maintained no reserves. Plaintiff’s obligation to reimburse American Bankers for insurance claims incurred was limited in the aggregate to the amount it received from American Bankers according to the treaty.
40. Plaintiff was not required by the state regulatory agencies to establish an unearned premium reserve with respect to its reinsurance of American Bankers’ accident and health insurance policies under Treaty I because as of each payment from American Bankers to plaintiff, all such reinsurance premiums had been fully earned by plaintiff, and no portion of the reinsurance premiums received and held by plaintiff represented payment for insurance to be provided after the payment date.
41. Under Treaty II, plaintiff reinsured 80 percent (and later 65 percent) of the accident and health insurance, which it now wrote directly, with American Bankers. This reinsurance was not ceded on a month-to-month basis as earned, but all at once from the outset of the policy term. Plaintiff therefore remitted the entire premium, less commissions to agents, for the portion reinsured to American Bankers initially. American Bankers’ obligation to reimburse plaintiff for insurance claims incurred was not limited in any way. American Bankers, holding the premiums, therefore established the reserves required for such insurance. Plaintiff established no such reserves.
*66742. Plaintiff was not required by any state regulatory agency to establish any unearned premium reserves as to insurance ceded by it to American Bankers under Treaty II because plaintiff held no unearned premiums on such policies, but instead received credit for reserves properly established by American Bankers, which did hold those premiums.
43. The unearned premiums and corresponding reserves in question under both treaties were physically held by American Bankers, which received the investment income therefrom, and which reported said reserves for purposes of state regulation as well as taxation. Plaintiff did not obtain or use the unearned premiums reflected in the annual statements of American Bankers, nor were said unearned premiums credited, set apart, or made available to plaintiff. There was no common or direct control of American Bankers by plaintiff or vice versa.
44. There was no existing state law which would have had the effect of “attributing” to plaintiff any reserves held by American Bankers on the insurance which was the subject of Treaties I and II. As unrelated parties to arm’s-length agreements, both plaintiff and American Bankers received benefits and gave consideration for said benefits under these treaties. The unearned premiums received by American Bankers were subject to no control or other proprietary interest on the part of plaintiff.
45. Under Treaty I, plaintiff had no obligation to refund premiums paid by policyholders of American Bankers in the event of premature termination of policies issued by American Bankers, since plaintiff received such premiums only after they had been fully earned. Consequently, there was no need, either legal or practical, for plaintiff to establish an unearned premium reserve for the purpose of maintaining a fund available for the refund of premiums.
46. Under Treaty II, since American Bankers received the accident and health premiums before they were earned, and since American Bankers’ obligation to bear the cost of claims was not limited in any way, American Bankers properly maintained unearned premium reserves as to the por-' tion of such policies reinsured.
*66847. The treaties in question and the method of maintaining reserves pursuant thereto were not unusual in the insurance industry at this time, and are still in use. The maintenance of said reserves was proper from an actuarial and an accounting point of view. It is standard in reinsurance accounting that the company which possesses the unearned premiums is the only company required to maintain the reserves thereon, unless one of the companies is not a qualified reinsurer.'
48. The insurance industry is regulated by the states. A particular insurance company must meet the various industry requirements of its home state, and must satisfy the requirements of all states in which it is qualified to act as an insurer. The state requirements include standards for investments, maintenance of reserves, and accounting practices. The state insurance departments surpervise policy forms, agency relationships, and the general financial activities of the companies within their jurisdictions. This regulation is designed to preserve the solvency of the insurance companies for the protection of policyholders.
49. To implement their regulatory function, state insurance departments require companies to file annual reports. Because reports are required in all states in which a company is qualified to act as an insurer, a standard report form has been developed by the National Association of Insurance Commissioners, which is used in all fifty states. These reports disclose, among other things, the reserves being maintained by each company.
50. In addition to requiring annual reports, the various state insurance departments conduct regular triennial examinations of insurance companies. Where the volume of business warrants it as to a particular company, it is customary for representatives of several state insurance departments to work together on these examinations. The examinations are carried out at the offices of the company in question, and may take as long as several months for large companies. Among the matters which are investigated in the course of such an examination are the reinsurance treaties to which a particular company is a party.
*66951. When a state insurance department is presented with a reinsurance agreement in existence between parties, its investigation will include a determination that each party has established adequate reserves according to its respective liabilities pursuant to the terms of the reinsurance agreement.
52. Plaintiff was the subject of triennial examinations in 1959 and 1963 by the insurance department of Arizona.
53. American Bankers was the subject of triennial examinations in 1960 and 1963. Participants in the 1960 examination were from the insurance departments of Florida, North Carolina, Georgia, and Texas; and participants in the 1963 examination were from the insurance departments of Florida, Georgia, Arizona, and Arkansas.
54. The reinsurance treaties between plaintiff and American Bankers were examined in detail in the course of the aforesaid examinations. The existence of reserves for accident and health insurance held by American Bankers on the policies covered by those treaties was clear to the examiners. Also the maintenance of the reserves by American Bankers under the treaties during Period I and Period II was approved in the course of the four examinations; no requirement or even suggestion was made in the examination reports that the reserves should be otherwise maintained.
55. There is no federal law pertaining to the matters of regulation which constitute the responsibility of the various states as described above.
56. Insofar as pertinent to this litigation, Treaty I read as follows:
AETICLE I
American Bankers agrees to cede to Consumer Life and Consumer Life agrees to accept reinsurance to the extent set forth below:
One Hundred Per Cent (100%) of each and every Life policy and each and every Health and Accident policy (herein called “Life policies” and “Health and Accident policies”) issued by American Bankers in. respect to debtors of Consumer Life and its subsidiary and affiliated corporations. The liability of Consumer Life under said Life and Health and Accident policies shall follow the _ liability of American Bankers except that the liability of Consumer Life arising under its reinsurance of said Health and Accident policies is on a month to *670month basis only and is limited solely to such amounts as shall become payable by Consumer Life under the provisions of Article V prior to the termination of this agreement.
ARTICLE II
This agreement applies to all said policies issued by American Bankers on or after the 1st day of July, 1957.
ARTICLE III
American Bankers shall furnish Consumer Life on or before the 20th day of July, 1957 and on or before the 20th day of each month thereafter, a statement showing the following information on transactions of the preceding month:
A. On all Life policies the statement will show:
(1) The amount of premiums collected;
(2) The amount of premiums returned on account of cancellation or other reason; and
(3) The amount of losses paid.
. B. On all Health and Accident policies the statement will show:
(1) The amount of premiums collected;
(2) The amount of premiums returned on account of cancellation or other reason;
( 3) The amount of losses paid;
(4) The amount of losses reported and unpaid and the estimated amount of losses incurred and unreported at the end of the preceding month; and
(5) The amount of premiums earned.
For the purpose of computing premiums earned during any month on Health and Accident policies under this Article III, the sum of the premiums collected on policies written during the month less any premium returned because of cancellation or other reason during the month, shall be added to the unearned premium reserve at the beginning of the month on policies then in force, and from the total sum so obtained shall be subtracted the unearned premium reserve at the end of the month on policies in force at that time.
For the purpose of computing losses, losses reported and unpaid and losses incurred and unreported, the allocated loss expense shall be added to the amount of loss claims. In tins connection the allocated loss expense shall be all claim expenses over and above the usual claim expenses incurred in the routine handling of a claim in the ordinary course of business, it being the intent of *671the parties hereto to include such expenses as the hiring of a special investigator, unusual travel expense in connection with the handling of a claim, attorney’s fees arising from a claim and other expenses not incurred in the usual and ordinary course of handling a claim.
ARTICLE IV
In addition to the monthly statement set forth in Article III, American Bankers agrees to furnish Consumer Life on or before the 20th day of January each year and from time to time as may be requested by Consumer Life, but in no event more often than monthly, a statement containing the following information 'as at the end of the month preceding the statement:
A. The amount of reserve on all life policies then in force;
B. The amount of losses on Life policies reported and unpaid and the estimated amount of losses incurred but unreported;
C. The amounts of insurance on all Life policies;
D. Such other information as may be required to complete annual statements or other statements as required by law.
Consumer Life shall, at all reasonable times during this agreement, have full and free access to all books, records and files of American Bankers’ office with respect to the business covered by this agreement.
ARTICLE V
In consideration of the reinsurance as set forth in Article I, the American Bankers agrees to pay monthly to Consumer Life, based on the statement set forth in Article III for the preceding month, and payable at the same time: (1) Eighty-seven and One-half Per Cent (871^%) of the premiums collected less any premiums returned on all Life policies, and (2) Eighty-seven and One-half Per Cent (8714%) of the premiums earned on all Health and Accident policies.
Conswmer Life agrees to reimburse American Bankers before the 30th day of the month after such statement is submitted, for all losses actually paid during the preceding month on Life policies and all losses actually paid during the preceding month on Health and Accident policies plus any increase or less any decrease during said month in the amount of Health and Accident losses reported and unpaid and incurred and unreported.
*672ARTICLE VI
American Bankers shall maintain all unearned premiums, loss and other reserves as may be required by law against all Health and Accident policies. Consumer Life shall maintain policy and other reserves as may be required by law on all Life policies.
ARTICLE VII
American Bankers agrees to pay all state, county, or city taxes which may be or become due in connection with the insurance sold or premiums collected on policies reinsured under this agreement.
ARTICLE VIII
American Bankers has furnished to Comumer Life and Comumer Life has acknowledged having received from American Bankers specimen forms upon which all said policies covered hereby are currently written. American Bankers reserves the right to make changes in such forms from time to time, but shall promptly notify Comuzmer Life of all such changes.
ARTICLE IX
The supervision 'and payment of all claims on policies covered by this agreement shall be handled by American Bankers and the decision of American Bankers in settling, rejecting or defending such claims shall be binding on Comumer Life.
ARTICLE X
In the event of the insolvency of the American Bankers, all reinsurance shall be payable directly to the liquidator, receiver or statutory successor of said American Bankers, without diminution because of the insolvency of American Bankers.
In the event of insolvency of American Bankers, the liquidator, receiver or statutory successor shall give Comumer Life written notice of the pendency of a claim on the policy reinsured within a reasonable time after such claim is filed in the insolvency proceeding. During the pendency of any such claim, Consumer Life may investigate such claim and interpose in the name of American Bankers (its liquidator, receiver or statutory successor,) but at its own expense, in the proceeding *673where such claims are to be adjudicated, any defense or defenses which Consumer Life may deem available to American Bankers or its liquidator, receiver or statutory successor.
ARTICLE XI
All disputes and differences between the two contracting parties upon which an amicable understanding cannot be reached are to be decided by arbitration and the arbitrators, who shall regard this agreement from the standpoint of practical business and equity rather than from that of the strict law, are empowered to determine as to the interpretation of the agreement obligation.
The court of arbitrators which is to be held in the city of Miami, Florida, shall consist of three arbitrators who must be officers of life insurance companies other than the two parties of this agreement. One of the arbitrators is to be appointed by American Bankers, the second by Consumer Life and the third is to be selected by these two representatives before the beginning of the arbitration. Should one of the parties decline to appoint an arbitrator or should the two arbitrators be unable to agree upon the choice of a third, the appointment shall be left to the president of the American Life Convention.
The arbitrators are not bound by any rules of law. They shall decide by a majority of votes and from their written decision there can be no appeal. The cost of arbitration, including the fees of the arbitrators, shall be borne by the losing party unless the arbitrators shall decide otherwise.
ARTICLE XII
This agreement constitutes the entire contract between the parties and may not be altered, modified or in any ways amended except by an instrument in writing duly executed by the proper official of both parties.
ARTICLE XIII
This agreement may be terminated by either party effective on the last day of any month upon at least thirty (30) days written notice of the other party.
Upon termination by either party, this agreement shall continue to apply to all policies reinsured hereunder before such termination becomes effective.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be signed and sealed by their duly authorized officers on this 28 day of June, 1957.
*67457. By amendments effective November 1,1957 and April 1, 1958, American Bankers’ retained share of the total premiums received annually in excess of $200,000 was reduced from 12y2 percent, as provided in Article V of Treaty I, finding 56, supra, to 9 y2 percent.
58. Treaty I was further amended May 28, 1958, effective as of July 1, 1957, to revise the extent of plaintiff’s interim liability as the reinsurer of American Bankers’ exposure under the A & H coverages subject to the Treaty. At all times, however, plaintiff reinsured the entire risk represented by those coverages, the only change being in the timing of its loss indemnity payments to American Bankers. At the time of this amendment plaintiff had accumulated a surplus fund of $130,000 from A & H premium receipts out of which to meet its reinsurance obligations which were averaging approximately $3,000 per month.
59. Treaty II is recited in toto. It read as follows:
ARTICLE I

Basis of Reinsurance

1. On and after the effective date hereof, the Ceding Company’s liability under Credit Accident and Sickness policies issued directly by the Ceding Company on the policy forms specified in Schedule A, attached hereto, shall be reinsured automatically to the degree and in the manner hereinafter specified.
2. The reinsurance liability of American Bankers during 1962 shall be 80% of each policy issued by the Ceding Company; thereafter, with respect to new business, such reinsurance liability may be reduced at the option of the ceding company at the beginning of each subsequent calendar year.
3. Reinsurance hereunder shall apply and be subject to all benefits and limitations included in policies issued by the Ceding Company and subject to reinsurance hereunder.
ARTICLE II

Mode of Cession

1. Reinsurance of Credit Accident and Sickness insurance issued or renewed by the Ceding Company on and after the effective date of this Agreement shall be effected *675by the Ceding Company’s mailing- to American Bankers a reinsurance cession on a form of which a sample is attached hereto and marked Schedule B, not later than the twentieth day following the last day of the calendar quarter covered by the reinsurance cession. The liability of American Bankers shall:
(a) commence as of the effective dates of the reinsurance premiums, and
_(b) continue only for the period covered by the reinsurance premiums.
% In no event shall the reinsurance be in force and binding unless the policy issued by the Ceding Company to the insured is in force.
ARTICLE III

Reinsurance Premiums

1. The reinsurance premiums to be paid the American Bankers by the Ceding Company shall be the premiums charged the insured by the Ceding Company during the calendar quarter for the coverage reinsured.
2. The American Bankers will pay to the Ceding Company a commission of 50% of reinsurance premiums received, as specified in this Article, on reinsurance hereunder.
ARTICLE IV

Oversights

1. American Bankers shall be bound as the Ceding Company is bound, and it is expressly understood and agreed that if non-payment of premiums within the time specified or failure to comply with the terms of this Agreement is shown to be unintentional and the result of misunderstanding or oversight on the part of either the Ceding Company or American Bankers, both the Ceding Company and American Bankers shall be restored to the positions they would have occupied had no such error or oversight occurred.
ARTICLE V

Payment of Claims

1. At the end of each calendar quarter American Bankers shall reimburse the Ceding Company for American Bankers share of all claim payments made by the Ceding Company during the calendar quarter on policies reinsured hereunder.
*6762. It is hereby understood and agreed that the American Bankers shall be liable only for claims incurred on or after the effective date hereof.
ARTICLE VI

Experience Befwnds

1. Reinsurance ceded hereunder shall be eligible for an Experience Refund. The Experience Refund for a given calendar quarter shall be computed as follows:
Experience Refund = (P-Co-E-Cl)
where P=earned reinsurance premiums during the calendar quarters as determined by American Bankers.
Co=earned reinsurance commissions during the calendar quarter as determined by American Bankers.
E=an expense, profit, and contingency charge equal to .03P.
Cl=incurred reinsurance claims during the calendar quarter as determined by American Bankers.
2. If P-Co-E-Cl is negative for a given calendar quarter such negative amount will.be treated as an addition to the incurred claims in calculating the Experience Refund for the following calendar quarters.
ARTICLE VII
Taxes, Assessments and Expenses
Neither party hereto shall be liable to the other for taxes, assessments, or any expenses resulting from reinsurance hereunder. The Ceding Company shall furnish the American Bankers with all necessary information so that American Bankers will not be required to perform any office work other than the regular bookkeeping entries made in connection with reinsurance accounting.
ARTICLE VIII

Inspection of Records

American Bankers shall have the right at any reasonable time to inspect at the office of the Ceding Company all books and documents relating to the reinsurance under this Agreement.
*677ARTICLE IX

Insolvency

1. In the event of insolvency of the Ceding Company, all reinsurance in force shall be payable to its liquidator or receiver without diminution because of the insolvency of the Ceding Company by any court of competent jurisdiction or any justice or judge thereof, or by any receiver or liquidator having 'authority to determine and allow such claims. It is understood, however, that in the event of the insolvency of the Ceding Company, the liquidator, receiver or statutory successor of the Ceding Company shall give written notice of the pend-ency of a claim against the Ceding Company on the policy reinsured with [in] a reasonable time after such claim is filed in the insolvency proceedings and that during the pendency of such claim the American Bankers may investigate such claim and interpose, at its own expense, in the proceedings where such claim is to be adjudicated any defense or defenses which it may deem available to the Ceding Company or its liquidators or receiver or statutory successor.
2. The expense thus incurred by American Bankers shall be chargeable against the Ceding Company as part of the expense of liquidation to the extent of a proportionate share of the benefit which may accrue to the Ceding Company solely as a result of the defense undertaken by American Bankers.
ARTICLE X

Settlement of Claims

1. American Bankers shall be liable to the Ceding Company for the benefits covered by reinsurance hereunder to the same extent as the Ceding Company is liable to the insured for such benefits and all reinsurance shall be subject to the terms and conditions of the particular form of policy under which the Ceding Company shall be liable.
2. It is hereby understood and agreed that the American Bankers shall be liable only for claims incurred on or after the effective date hereof.
3. Whenever a claim is made under a policy of the Ceding Company, which has been reinsured hereunder, it shall be taken and considered by American Bankers to *678be a claim for the amount of reinsurance on such risk and American Bankers shall abide the issue as it shall be settled by the Ceding Company and shall pay the amount of reinsurance covered by the policy of reinsurance when the Ceding Company shall settle with the Claimant.
4. Any suit or claim may be contested or compromised on the part of the Ceding Company and in case of a reduction of the claim made upon the Ceding Company, American Bankers and the Ceding Company shall participate in such reduction in the ratio that each company’s net liability bore to the total net liability prior to the reduction of the claim. Any unusual expenses incurred by the Ceding Company in defending or investigating any claims or taking up or rescinding any policy reinsured hereunder aside from routine investigations and other expenses incidental to the settlement of claims shall be shared in the same proportion.
5. In every case of loss, copies of proofs obtained by the Ceding Company shall likewise be taken as sufficient by American Bankers and copies thereof, together with a statement showing the amount paid on such claim by the Ceding Company shall be furnished to American Bankers before payment shall be demanded of it.
ARTICLE XI

Arbitration

1. All disputes and differences between the two contracting parties upon which an amicable understanding cannot be reached are to be decided by arbitration and the arbitrators, who shall regard this treaty from the standpoint of practical business and equity rather than from that of the strict law, are empowered to determine as to the interpretation of the treaty obligation.
2. The court of arbitrators which is to be held in the City of Miami, Florida, shall consist of three arbitrators who must be officers of life insurance companies other than the two parties of this Agreement. One of the arbitrators is to be appointed by the Ceding Company, the second by American Bankers and the third is to be selected by those two representatives before the beginning of the arbitration. Should one of the parties decline to appoint an arbitrator or should the two arbitrators be unable to agree upon the choice of a third, the appointment shall be left to the counsel for the Consumer Credit Insurors Association.
*6793. The arbitrators are not bound by any rules of law. They shall decide by a majority of votes and from their written decision there can be no appeal. The cost of arbitration, including the fees of the arbitrators, shall be borne by the losing party unless the arbitrators shall decide otherwise. • ■
ARTICLE Nil

Parties to Agreement

This is an agreement solely between the Ceding Company and American Bankers. The acceptance of reinsurance hereunder shall not create any right or legal relation whatever between American Bankers and the insured or the beneficiary under any policy of the Ceding Company which may be reinsured hereunder.
ARTICLE XIII

Duration

1. This agreement shall be effective as of the 1st day of March 1962, and may be terminated as of the end of any calendar quarter by either party giving to the other not less than 30 days’ written notice.
2. Upon termination, as provided in this Article, the Ceding Company shall, within 30 days of the termination date, supply American Bankers with the informa» tion necessary to calculate the final experience refund as of the termination date. Payment of (a) the final experience refund, (b) the unearned premium reserve held by American Bankers less unearned commissions thereon, and (c) payment of the claim reserve held by American Bankers.
60. On December 2,1964, effective October 1, 1964, plaintiff and American Bankers executed the following amendment to Treaty II:
ADDENDUM TO REINSURANCE AGREEMENT
THIS AGREEMENT, made this 2nd day of December, 1964, and effective the 1st day of October, 1964, by and between CONSUMER LIFE INSURANCE COMPANY OF PHOENIX, ARIZONA, hereinafter designated as “Ceding Company” and AMERICAN *680BANKERS LIFE ASSURANCE COMPANY OF FLORIDA, a corporation duly organized and existing under and by virtue of the laws of the State of Florida and having its executive office in the City of Miami, and State of Florida, hereinafter designated as “Company”.
WITNESSETH:
WHEREAS, the Company and the Ceding Company entered into a Reinsurance Agreement on the 1st day of March, 1962; and
WHEREAS, the parties are mutually desirous of amending said Agreement as hereinafter set forth.
NOW, THEREFORE, IT IS MUTUALLY UNDERSTOOD AND AGREED AS FOLLOWS:
1. The terms and conditions of said Reinsurance Agreement are incorporated within the terms of this Agreement.
2. Article I, Paragraph (2) is hereby amended to read: The reinsurance liability of American Bankers shall be 65% of each policy issued by the Ceding Company ; thereafter, with respect to new business, such reinsurance liability may be reduced at the option of the Ceding Company at the beginning of each subsequent calendar year.
3. All other conditions are to remain the same.
61. On December 29, 1964, effective December 31, 1964, plaintiff and American Bankers executed the following further amendment to Treaty II:
AMENDMENT TO Reinsurance Agreement between Consumer Life Insurance Company of Phoenix, Arizona, and American Bankers Life Assurance Company of Florida, of Miami, Florida, dated April 18, 1962.
Article VI of above mentioned Reinsurance Agreement is hereby amended to read as follows:
ARTICLE VI

Experience Refunds

1. Reinsurance ceded hereunder shall be eligible for an Experience Refund. The Experience Refund for a given calendar quarter shall be computed as follows:
*681Experience Eefund = (P-Co-E-Cl-N)
where P=earned reinsurance premiums during the calendar quarter as determined by American Bankers.
Co=earned reinsurance commissions during the calendar quarter as determined by American Bankers.
E=an expense, profit, and contingency charge equal to .03P.
Cl — incurred reinsurance claims during the calendar quarter as determined by American Bankers.
N=negative carry-forward from prior quarter.
2. If a negative amount is obtained from the calculation of the Experience Eefund for a given calendar quarter, such negative amount will be carried forward in calculating the Experience Eefund for the following calendar quarter, provided, however, that any un-amortized balance of such negative carry-forward will be dropped from the refund calculation after 20 quarters. The “first-in, first-out” principle will apply to the un-amortization of two or more negative carry-forwards arising from the experience of different calendar quarters.
IN WITNESS WHEEEOF the parties hereto have caused this Amendment to be executed in duplicate this 29th day of December, 1964, and to be effective for calculating the Experience Eefund due for the calendar quarter ending December 31,1964.
ULTIMATE CONCLUSION OP FACT
62. Unearned premiums and the corresponding reserves held pursuant to Treaty I are not includable in planitiff’s “total reserves” for purposes of Internal Eevenue Code Section 801.
63. Unearned premiums and the corresponding reserves held pursuant to Treaty II are not includable in plaintiff’s “total reserves” for purposes of Internal Eevenue Code Section 801.
64. Plaintiff qualified as a life insurance company for purposes of Section 801 because its life insurance reserves exceeded 50 percent of its total reserves, as that term is defined in Section 801(c), as shown by plaintiff’s income tax returns for the years 1958, 1959, 1960, 1962, 1963, and 1964.
*682CONCLUSION 03? LAW
Upon the foregoing opinion and findings of fact, which are made a part thereof, the court concludes as a matter of law that plaintiff is entitled to recover; and judgment is entered to that effect, with the determination of the amount of recovery to be made in further proceedings under Hule 131(c).