Provides for the formation of mutual holding companies by certain domestic mutual life insurers, and the reorganization of such life insurers into domestic stock life insurers

Summary of specific provisions

Adds a new Article 80 to the Insurance Law providing for the reorganiza- tion of a domestic mutual life insurer with admitted assets of less than $10 billion into a domestic stock life insurer through the formation of a new mutual holding company which owns, directly or through one or more stock holding companies, at least 51% of the reorganized mutual life insurer. The new Article 80 specifies in great detail: 1) The process for reorganization and required contents of the plan of reorganization; 2) obligations to policyholders; 3) application and review by the super- intendent of financial services including the holding of a public hear- ing; 4) the process for policyholder review and voting on a reorganiza- tion plan; 5) restrictions on compensation received by officers, directors and employees of the reorganized company; 6) requirements on board members of the mutual holding company and any stock holding compa- ny, including a requirement for outside directors of each, and annual filings to be made by the mutual holding company with the superintendent if required by the superintendent; 7) limitations on stock options and stock awards to officers and directors of the mutual holding company, stock holding company and the reorganized insurer; 8) limitations on ownership of voting stock of the reorganized insurer by officers and directors of the mutual holding company, stock holding company and the reorganized insurer; and 9) many other matters related to the regu- lation, powers and duties of a reorganized mutual holding company.

Section two sets out the effective date.

Justification

Similar statutes allowing for insurance mutual holding companies have been enacted into law in 32 states and the District of Columbia. At least 30 mutual life insurance companies in the United States have converted to a mutual holding company structure. New York domestic mutu- al life insurers are at a competitive disadvantage because they do not have the authority to reorganize in the same manner. In New York State, there are a number of upstate companies, each with admitted assets of less than $10 billion, that could enhance the interests of policyholders

by availing themselves of this proposed law and, as a result, being able to raise capital or merge with other mutual holding companies, thereby contributing to the growth of New York's upstate economy.

As a major part of the financial services industry, life insurers today face the same competitive pressures and capital needs that are linked to any mergers, consolidations and capital-raising activities occurring throughout the financial services arena. Within the life insurance industry itself, insurers must enhance and strengthen capital, liquidity and profitability in order to hold their own against intense competi- tion. The insurance-buying public looks carefully at financial ratings and capital base. As a consequence, more than ever before, access to capital is critical. However, one segment of the life insurance industry - mutual life insurers - has a decided disadvantage compared to stock life insurers in accessing capital markets. Since mutual insurers cannot issue stock, they do not have the array of methods for accessing capital markets that their stock insurer counterparts do. Additionally, mutual insurers are limited in their ability to consolidate and grow through acquisitions because other companies can only be acquired as subsid- iaries of the mutual life insurer, and this structure limits the size of acquisitions because subsidiaries are subject to a 30%- risk-based-capi- tal factor, statutory accounting requires write - off of the good will element of the purchase price, and legal investment laws may limit the amount an insurer may invest in subsidiaries. Therefore, this law would enhance the ability of life insurers to consolidate and grow through acquisitions.

One of the few alternatives for a mutual life insurer is to convert to a stock form of ownership in a process called demutualization. Demutuali- zation (or conversion) of New York domestic mutual life insurers is currently authorized pursuant to Insurance Law Section 7312. However, proceeding directly with demutualization is a major undertaking involv- ing complexity and uncertainty. The feasibility of raising capital through demutualization can be hampered by stock market conditions, which can be volatile and uncertain, and by strains on the profitability of the insurance business. Conversion to the stock form opens a mutual life insurer to the possibility of hostile acquisition by a foreign management - presenting uncertainty and instability which may make life policyholders uncomfortable. There are therefore a number of mutual life insurers for which demutualization may not be an attractive alter- native, but which still have a need to raise capital to support their business.

This bill would authorize a domestic mutual life insurer with admitted assets of less than $10 billion to reorganize into a domestic stock life insurer through the formation of a new mutual holding company which owns, directly or through one or more stock holding companies, at least 51% of the reorganized mutual life insurer. The new organization could permit capital raising by selling voting stock of the reorganized insur- er or one or more stock holding companies to persons other than the mutual holding company, and the issuer of such voting stock contributing all or a portion of the proceeds down to its stock life insurer subsid-

iary. Such a reorganization would not affect the obligations of the reorganizing insurer. All insurance obligations of the reorganizing insurer stay intact. Policyholders/members would retain membership, voting rights and rights to participate in any distribution of surplus, but such rights in the insurer become instead rights in the mutual hold- ing company. Policyholders/members would continue to control the reor- ganized insurer through their new membership interests in the mutual holding company, the directors of which are elected by the members. Policyholders then have the ability to protect and strengthen their financial position by raising new capital through a controlled subsid- iary. Such a structure has been successfully employed by mutual savings banks in New York under Article VI-C of the Banking Law (enacted in 1989) and by thrifts since the late 1980s in many other states.

The bill contains a number of provisions that protect the interests of policyholders of the reorganizing insurer.

Dividend Practices. To further protect the dividend expectations of participating policyholders, the bill requires that the reorganized insurer, on or before the date on which less than 75% of the votes eligible to be cast by the mutual holding company's members are held by owners of the reorganized insurer's participating policies or contracts, either (a) establish a "closed block" to which would be allocated assets in an amount sufficient, with anticipated revenue, to support the mutual life insurer's individual, dividend-paying participating business, including continuation of current dividend scales if the experience under the scales continues, or (b) provide as to its participating indi- vidual policies in a manner approved by the superintendent.

Reorganization Procedural Safeguards. The reorganization of a domestic mutual life insurer through the formation of a mutual holding company would be subject to the procedural safeguards applicable to life insurer demutalization under current law, including board approval, a public hearing, the superintendent's approval and approval by eligible policy- holders.

Required Outside Directors of Mutual Holding Company and Stock Holding Company and Limitations on their Ownership Interests in the Reorganized Insurer. The bill provides that (a) at least two-thirds of the directors of the mutual holding company and of any stock holding company, all of the members of the compensation committee of the board of directors of the mutual holding company and of any stock holding company, at least two-thirds of the members of any committee responsible for making deci- sions affecting the capital structure or mergers and acquisitions, and a majority of the directors on each other committee of the board of direc- tors of the mutual holding company and any stock holding company must be outside directors; and (b) the aggregate percentage of voting securities of the reorganized insurer directly or indirectly owned, controlled or held with the power to vote, either personally or by persons (other than the mutual holding company and any stock holding company) of which they are directors, officers or employees, by outside directors, may not exceed three percent or such lesser percentage as may be determined by

the superintendent in his approval of the mutual holding company's plan of reorganization.

Supermajority of Directors of Mutual Holding Company and Stock Holding Company required in Certain Instances. The bill requires that the by-laws of the mutual holding company and any stock holding company provide that the affirmative vote of at least two-thirds of the board of directors of such company be required for any action by such company to (a) adopt a plan of conversion of the mutual holding company, (b) enter into a merger with the mutual holding company, or (c) conduct a public offering or authorize the issuance of any voting stock or security convertible into voting stock of the reorganized insurer or the stock holding company to any person other than the mutual holding company or the stock holding company.

Limitations of Management Stock Options and Stock Awards. The bill provides that, subject to a limited exception, until six months after the completion of either an initial public offering or the first issu- ance of voting stock or securities convertible into voting stock of the reorganized insurer or the stock holding company to any person other than the mutual holding company or the stock holding company, neither the stock holding company nor the reorganized insurer may award any stock options or stock grants to persons who are officers or directors of the mutual holding company, the stock holding company or the reorgan- ized insurer.

Aggregate Limitations on Management Ownership of Voting Stock. The bill provides that, until two years after the six month period after the completion of either an initial public offering or the first issuance of voting stock or securities convertible into voting stock of the reorgan- ized insurer or the stock holding company to any person other than the mutual holding company or the stock holding company, the officers and directors of the mutual holding company, a stock holding company and of the reorganized insurer may not own beneficially, in the aggregate, more than five percent of the voting stock of the reorganized insurer.

Superintendent to Approve Valuation of Stock Offering Prior to Initial Public Offering. The bill provides that any issuance of voting stock or securities convertible into voting stock of the reorganized insurer or the stock holding company prior to an initial public offering, private equity placement, or the issuance of public or private voting stock or securities convertible into voting stock of the reorganized insurer or stock holding company or any other type of capital raised must be approved by the superintendent as to the proposed valuation of such stock or securities.

Limitations on Accumulation of Surplus of a Mutual Holding Company. The bill provides limitations of the amount of "non-insurance surplus" and "aggregate capital and surplus" that may be maintained by a mutual hold- ing company. The superintendent may permit the mutual holding company to exceed these limits for a period not exceeding one year.

Superintendent Approval Required of Mutual Holding Company Merger, Consolidation and Other Reorganization. Recognizing that the reorganiza- tion of a domestic mutual life insurer through the formation of a mutual holding company and its stock life insurer subsidiary is, in effect, the continuance of the existence of the mutual life insurer in another form. The bill would allow a mutual holding company to engage in mergers, consolidations and other reorganizations subject to the superintendent's approval.

Fiscal implications

None.

Effective date

Immediately.