BILL NUMBER: S5305
SPONSOR: BAILEY
 
TITLE OF BILL:
An act to amend the insurance law, in relation to the formation of mutu-
al holding companies by certain domestic mutual property/casualty insur-
ers and the reorganization in connection therewith of a domestic mutual
property/casualty insurer into a domestic stock property/casualty insur-
er
 
PURPOSE OF BILL:
This bill would authorize a domestic mutual property/casualty insurer to
reorganize into a domestic stock property/casualty 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 reor-
ganized mutual property/casualty insurer.
 
SUMMARY OF SPECIFIC PROVISIONS:
Adds a new Article 81 to the Insurance Law providing for the reorganiza-
tion of a domestic mutual property/casualty insurer into a domestic
stock property/casualty insurer through the formation of a new mutual
holding company which owns, directly or through one or more stock hold-
ing companies, at least 51% of the reorganized mutual property/casualty
insurer. The new Article 81 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.
 
JUSTIFICATION:
Similar statutes allowing for insurance mutual holding companies have
been enacted into law in 34 states and the District of Columbia. Numer-
ous property/casualty insurance companies in the United States have
converted to a mutual holding company structure in recent years. New
York domestic mutual property/casualty insurers are at a competitive
disadvantage because they do not have the authority to reorganize in the
same mariner. In New York State, there are many companies 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 economy. As a major part of the financial services industry,
property/casualty insurers today face the same competitive pressures and
capital needs that are linked to any mergers, consolidations and capi-
tal-raising activities occurring throughout the financial services
arena. Within the property/casualty insurance industry itself, insurers
must enhance and strengthen capital, liquidity and profitability to hold
their own against intense competition. 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 property/casualty insurance industry - mutual property/casualty
insurers - has a decided disadvantage compared to stock
property/casualty 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 consol-
idate and grow through acquisition s because other companies can only be
acquired as subsidiaries of the mutual property/casualty insurer, and
this structure limits the size of acquisitions because subsidiaries are
subject to a%- riskbased-capital 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 subsid-
iaries. Therefore, this law would enhance the ability of
property/casualty insurers to consolidate and grow through acquisitions.
One of the few alternatives for a mutual property/casualty insurer is to
convert to a stock form of ownership in a process called demutualiza-
tion. Demutualization (or conversion) of New York domestic mutual
property/casualty insurers is currently authorized pursuant to Insurance
Law Section 7307. However, proceeding directly with demutualization is a
major undertaking involving 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 property/casualty insurer to the possibility of
hostile acquisition by a foreign management - presenting uncertainty and
instability which may make property/casualty policyholders uncomforta-
ble. There are therefore a number of mutual property/casualty insurers
for which demutualization may not be an attractive alternative, but
which still have a need to raise capital to support their business.
This bill would authorize a domestic mutual property/casualty insurer to
reorganize into a domestic stock property/casualty 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 reor-
ganized mutual property/casualty 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 property/casualty
insurer subsidiary. Such a reorganization would not affect the obli-
gations 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 holding company. Policyholders/members would continue to control
the reorganized insurer through their new membership interests in the
mutual holding company, the directors of which are elected by the
members. Policyholders then can protect and strengthen their financial
position by raising new capital through a controlled subsidiary. 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,
provide as to its participating individual policies in a manner approved
by the superintendent.
Reorganization Procedural Safeguards. The reorganization of a domestic
mutual property/casualty insurer through the formation of a mutual hold-
ing company would be subject to the procedural safeguards applicable to
property/casualty insurer demutualization under current law, including
board approval, a public hearing, the superintendent's approval and
approval by eligible policyholders.
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 offer-
ing or the first issuance 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 reorganized 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. Superintendent Approval Required of Mutual Holding
Company Merger, Consolidation and Other Reorganization. Recognizing that
the reorganization of a domestic mutual property/casualty insurer
through the formation of a mutual holding company and its stock
property/casualty insurer subsidiary is, in effect, the continuance of
the existence of the mutual property/casualty insurer in another form.
The bill would allow a mutual holding company to engage in mergers,
consolidations, and other reorganizations subject to the superinten-
dent's approval.
 
LEGISLATIVE HISTORY:
2023-24: S3528 - Referred to Insurance
2021-22: S9021 - Referred to Insurance
 
FISCAL IMPLICATIONS:
None.
 
EFFECTIVE DATE:
Immediately.