The Devil Is In the Details

than addressing those questions ex ante, a scheme of liquidation accounts would maintain (2007). 55 concerned that adoption of the bill would eventually lead to federal insurance regulation to this closely mirrors new york law.36 24 since any shares would be oversubscribed del. code ann.tit.18,�4933(2007);ariz. rev. stat.�20-730(2007). underlying surplus distribution is to provide "fair and equitable" compensation for the poli- original shareholders, then subsequent shareholders must pay more to purchase the right their mutual business form prevents or limits their growth, and therefore, like the mutual whichresultinsignificantshiftsofsavingsfunds[todepositorsuponthedemutualization] fdcc quarterly/fall 2007 1. rights of policyholders, in theory tunity to understand how congressional leaders view insurance regulation and what future insurancepoolsthatwerenotprofit-driven.asthecourthasacknowledged,"in1886,tired issues and techniques, 27 tort & ins. l.j. 709, 711 (1992). continue to adhere to the current state regulations. in other words, the bill (if it were to be- 2007byjohngurleyandjosephcoughlin,availableatwww.lordbissell.com. company while giving them time to deploy their capital. including firrea and fdicia. widely-known throughout 22 similarly,inthedemutualizationofjohnhancockmutuallifeinsuranceco.,thecourt georgeh.guptilljr.,a feud between friends, best's review, may 1999, at 48. urban affairs, united states senate, april 8, 1974 at p. 00441. notthefirst,norwillitbethelastattempttofederalizeinsuranceregulation. especially with stock insurers. new york and massachusetts forbid mergers with stock 3.nia'sconsiderationrequirementsshouldbemoreflexible resolution.15 136 priority in the liquidation.57 oramutualholdingcompany,isapprovedbyover90%ofvotingmembers;30 50 a public offering.63 thefdccwebsite: 128 that[unionmutual]'sdemutualizationcannotproperlybesocharacterized.50 onmay24,2007,senatorsjohnsununu(r-nh)andtimjohnson(d-sd)introduced the other's positions and precedents. this would complicate and confuse both banking and 2. rights of policyholders, in practice therefore, the uncertainty about policyholders' rights, and the need to be ultimately tofullydemutualize).butsolongastheniarequiresdistributionofitssurplus,mutual unitedstatesv.south-easternunderwritersass'n,322u.s.533,539-540(1944). equityinitially.additionally,statesthatutilizetraditionalpayoutschemesalsocause,perhaps charters and federal licenses to insurers and insurance agencies, which would be excluded many state statutes. distribution, the use of subscription rights enhances the mutual company's ability to raise theniadistributionrequirementsunfortunatelyimplythatdemutualizationisaliqui- the exclusion of any meaningful role for the states, and consumer groups, who are concerned ofconsiderationtobegiventopolicyholdersaretoospecificandburdensome,andforeclose optionalfederalcharterbillisdeadonarrival(apr.12,2006). consideration differences in the nia against policyholders who claimed that their rights were property rights, and that the de- likely that policyholders are purchasing mutual insurance for the "`ephemeral rights'to vote the nia would committee to devise and put in operation a system of mutual insurance, the result of which federal home loan bank board, findings march 1, 1974. but the nia, which is generally modeled after federal banking laws, relies too heavily when the insurer's board adopted the initial plan.23 v. the nia does not expressly require any form of notice of the plan be given to policy- iowa code�508b.4(2007);n.y. ins. law�7307(2007). 12 niadiscussedintheprevioussectionoffersignificantflexibilityandimprovedefficiency 73 background to the nia create "policyholder confusion, market uncertainty," and other problems harmful to the presumably, the standards used by the national commissioner in determining whether 111 with subscription rights and not cash giveaways. the bank board found that "no method wouldgainnothingfromthedemutualization,butwouldreceive$500eachifmercerac- distribution schemes. not only would the nia windfall scheme be neglecting the lessons $37,000,000,000,ortheapproximateequivalentofthevalueofallfarmlandsand accumulated more "excess" surplus that is not the entitlement of the policyholders. a conclusion a. policyholders have incidents of ownership, but are not owners accesstocapital;(2)itaffordsmoreorganizationalflexibility;(3)itenhancesopportunity array of product choices the industry can provide and insurance companies should have a atthatmoment,regardlessofwhethertheycontributedsignificantlytothoseassets.those information is not any company, is accumulated over time. mutual insurers are decades, some over a century cyholders(differencesthatmotivatedemutualization),buttherightofpolicyholderstothe of outstanding votes which are based on one vote per 100 dollars on account, up to 1,000 votes. among the insurance company trade associations, the national association of acknowledgedtheimportantplaceofinsuranceinthenationaleconomy: bynewyorklaw,treatsthedemutualizationasliquidation,andthereforerequiresdistribu- id. at 00448. right in liquidation, thereby bestowing a right of ownership that is not universally recog- rather than imposing those same requirements by statute. but while the niadoes lessen the canada life 99.1 principal mutual 92 national insurance act of 2007 fdcc quarterly/fall 2007 scriptionrights,andaccordinglythedemutualizingmutualinsurersandthecommissioner national life of vermont 90 united heritage 97 51 1068 ("there were 686,000 and 442,000 eligible voters in [two wisconsin mutual insurers observed] in second, policyholders vote for the company directors. a mutual insurer is a corpora- the value of the withheld surplus in his decision to purchase their policy. there is not empirical evidence 64 fdcc quarterly/fall 2007 ship, or at least a greater sense of ownership. the treasury department there would be two theories and practices of law and regulation flexibilitythroughthevarietyofconsiderationoptions.butuponcloserexamination,it during liquidation. there are obviously keen differences between shareholders and poli- similarly, most states require supermajority approval of votes cast by the policyholders. cyholders are members of the mutual insurer, in some ways similar to shareholders of a � 2008 federation of defense & corporate counsel, inc. durationorrecentnessofmembership.florida,arizona,anddelaware,forexample,permit determine the procedural requirements, it prejudges what consideration is fair and equitable. sufficientcapitalpreserved,togetherwithpremiums,tocovertheinsuredrisksin interests in the mutual are converted to rights in the parent mhc, which owns the majority banks in the 1970s and 1980s, seek to convert to stock companies. butreceivedfewerthan3%ofthevote. national insurance act of 2007 choicebetweenstateandfederalregulation,"saidjohnson.6 student load mktg. ass'n v. lysinger, 2002 va. cir. lexis 248, at *14-15 (va. cir. ct. 2002). national insurance act of 2007 4 come from the life insurance industry, which believes it is at a considerable disadvantage 62 of the extortions of the old-line insurance companies, the territorial alliance appointed a incompetingwithbanksandotherfinancialinstitutionsprimarilyregulatedatthefederal (nov.2005),http://www.ifsl.org.uk/uploads/cbs_insurance_2005.pdf. mutualinsurersundertakethedemutualizationprocess. united states.2 holders, and should have the same equity in their mutual company, then the fairest approach ariz. rev. stat.�20-730(2007); del. codetit.18,�4933(2007);fla. stat.�628.441(2007);md. south-eastern underwriters,322u.s.at556(internalellipsesomitted). under pennsylvania law, converting mutuals can also provide policyholders with a liquidation account, ("theplaintiffs'argumentthatademutualizationisequivalenttoaliquidation,andthus,theaggregate nia was introduced, "we adamantly, adamantly, adamantly oppose the optional federal the nia conspicuously neglects mutual holding companies. many states, as well as 7 its exclusion is nonetheless noteworthy.16 directors. auction is a logical extension of the belief that policyholders are stockholder-like owners, year.22 requirementsfordemutualizationfromamutualcompanytoastockcompany(inwhich congress reacted by enacting the mccarran-fergusonact to exempt insurers from most ambiguous right, and instead gives policyholders exactly what they were entitled to in the rights of policyholders, but rather to highlight the issue and demonstrate the problem the by statute that policyholders have a right to consideration by way of distribution of the as- volves no cash transfers. policyholders, whose rights are considered inchoate interests in isonlyamarket-basedvaluation.subscription-baseddemutualizationsaccordinglytakeless theirsurplusmightelecttoremainstateinsurerswithinthedozensofstatesthatdopermit liabilities, not yet paid in dividends.54 149f.supp.2d80(s.d.n.y.2001)(reversedonothergroundsby378f.3d220) 14 industrial-alliance (canada) 96 prudential 92 company is liquidated, its assets are distributed to the policyholders and those expected, consciously bargained for, or purchased. simply put, distribution of the surplus and not companion legislation in the house by congressman ed royce (r-ca) is also expected to be introduced national insurance act of 2007 comelaw)wouldincreasetherangeoforganizationalchartersforinsuranceunderwriters 69 ownershipsuchasvotingandsurplusrightsonreorganization.thepolicyholders'rightsand voting rights differently than rights in surplus. voting rights are often premised on a minimum surplus), and they possibly retain their liquidation rights. policyholders who do not exploit conversionfromamutualbanktoastockbank.theflexibilityaffordedtotheotspermitted 1944,adjustedforinflation.moreandmore,insurersarelarge,nationalcompanies,offering theniathough,astatemutualinsurercouldfirstconverttoanationalmutualinsurer,and cal. ins. code�11536(2007). bothfederalandstatecourtshaverecognizedthatpolicyholders'rightsaresomething including the surplus he or she would receive "in liquidation or conversion of the insurer 116 25, 1994, at a1. conflictwiththeofficeofthriftsupervision("ots"),allwithinthesamedepartmentof theniarequiresveryspecificformsofconsideration,amountingtoacashwindfall currently faces an uphill battle. but even if the nia fails, similar proposals will certainly be itthereforedeprivesthenationalcommissionerofflexibilitytodeterminetheformand theotstodiscernthebestindustrypractices,anditultimatelydevelopedaprocessusing 125 troubledinsurancecompanies.underthriftregulation,forexample,theotscanrelaxcer- claims,providepolicyholderdividends,andsatisfywhateverotherbenefitsaccrued 120 first, if their right is merely an inchoate interest in liquidation, then the most pragmatic federal baking law delegates the authority to prescribe requirements for the con- 76 law this year, it demonstrates an accelerating movement. it is indicative of a growing belief companiesduringademutualization,whilecaliforniaandillinoispermitthem.40 thedefinitiontoincludeanypersonwhohaspaidpremiumswithinthepastfiveyears.78 theniawouldpresumablyadheretothecaliforniadefinitionandlimit"eligiblepersons" fdcc quarterly/fall 2007 motorco.,170n.w.668(mich.1919);kamm&schellingerbrewingco.v.stjosephco.villagefire council of insuranceagents & brokers,agents for change, theamerican bankersassociation, theamerican the magnitude of the value of lowering the bar for policyholder approval, from even three-fourths to a simple majority, cyholders' loss. but the policyholders who are members at the time of the demutualization expectation of liquidation. 46 i. id. butsimple-majorityapprovallikelyofferslittle,ifany,gaininefficiencyoranydetri- but even once-local mutual insurers, like their thrift counterparts, have grown immensely. panies.1 mhcs. in consideration for the conversion.52 downvoteonthefloorofcongress.thisyear,however,cosponsorsenatorjohnsununu 1 nat'lass'nofmut.ins.co.,http://www.namic.org/about/default.asp. event of a solvent liquidation of such a company."65 form, which limits their ability to raise capital or merge with stock insurers. more than the average annual revenue receipts of the united states government demutualizationisnotadissolutionofthecompany,buta"distribu[tion]to oftheentiresurplus,ornodemutualization.therefore,mutualinsurersseekingtoretain they all provide policyholders with dividends, the right to vote for company directors, and his valuable assistance with the preparation of this article. should be able to develop and tailor a larger variety of consideration options. first, declaring permitpolicyholderstovotebyproxyorbymail,anddefineaquorum.somestates,such offering the shares at a below-market price."73 by policyholders who would have senior rights, it would be reasonable to assume that the withoutamoreexpansivedefinition, patchwork of state regulation that affects all insurers, and (2) their own particular business stable companies in the country. therefore, the rights in surplus are inchoate rights, which utah expands gordono.pehrson,jr.,etal,demutualization of insurance companies: a comparative analysis of poli- insurers might rather form mhcs in order to retain that surpluses. by not providing an onlythreecompanieshadnegativereturnsineithertheone-yearortwo-year indeed, for much of the early twentieth century, mutual in- franklin then sent letters to mercer's policyholders saying that they (the policyholders) (%of (%of 123 interest in the insurance industry. tional mutual companies to national, public stock companies is indicative of the industry's membersofanon-profitcorporationelectitsdirectors,withoutanyclaimtoownershipof shareholders transforms the rights of policyholders in a manner that extinguishes those rights the devil is in the details entitled to that portion of the surplus than are the future shareholders or stock insurer. but product.thepolicyholderseldomtakesintoaccounttherelativefutureprofitabilityofthe formanydemutualizinginsurers.underfederalbankinglaw,thepracticewithrespectto illinois, indiana, massachusetts, and newyork, for example, require approval by two-thirds hrebec and michael trier, availableat www.lordbissell.com. utah code ann.�31a-5-506(4)(b)(i)(2007). demutualizationasonlyachangeintheformofownership,andrequiresthemutualinsurer fortheconsideration,usingacombinationofthesixforms.superficially,theniaprovides 2. form of distribution tostudystatevariationsinthedemutualizationprocess,andtopromulgatethefairestand terests.currentlystateregulatorsmarshalsignificantcontroloverdemutualization.under andmoremutualinsurersaredemutualizing. mutual insurers began in the late nineteenth century to provide local communities with to affect a policyholder's willingness to purchase mutual insurance. somestates,includingarizona,delaware, and would unnecessarily bind the insurer and the commissioner. the national insurance act of 2007 ("nia") is the latest step toward the federal regu- code ann., ins.�3-121(2007). 32 id.00459(31). with regulations. seealsothefederalcreditunionact,12u.s.c.��1751etseq. distribution requirements of the nia, in contrast with thrift regulation, could not be relaxed, pacificmutual 95 number of rights is based on the amount of deposit as of the date prior to adoption of a plan willnothaveanysignificanteffectonamutual'sabilitytodemutualize."thesupermajority s.40��1243(b)(2)(b),1243(b)(2)(c). conversion must virtually eliminate such `windfall' distributions."68 process which has been largely developed only in the recent two decades. fdcc 2008 roster ill. comp. stat.tit.215�5/59.1(2007);ind. code�24-15-5-7(2007);mass. gen. lawsch.175,� mitted assets or insurance business in force.55 createanoptionalfederalcharter,anofficeofnationalinsurancewithinthedepartment anddemonstratestheflawinattributingtothemapropertyrightinsomethingmorethan e. nia would permit mergers with stock companies during demutualization 68 id. at 515-516. izationprocess.theniainsteadrequiresthattheinsurer'sboardinitiatetheprocessby theniasignificantlyimprovestheproceduralrequirementsfordemutualization,rela- replacethefullsurpluslosttopolicyholderswithinvestmentfromtheipo,andthensome,or the redemption value thereof, and without taking into account the value of nonad- california, representing the minority of current state statutes, limits "eligible persons" to goalisnottoprovideaninequitablewindfallforpolicyholderswhoarethebeneficiariesof theirtrulynationalcharacter.mutualcompaniestodayfacetwohurdlestogrowth:(1)the fdcc quarterly/fall 2007 hardly arises to the level of an expectancy. it stretches the imagination very far to attribute any real value 114 douglasp.faucetteisabankingattorneyinlocke form under which the insurer conducts business, but leaves intact policyholders'incidents of home, the family, and the occupation or the business of almost every person in the 129 enfranchised policyholders, by eliminating the duration and policy-value requirements of theparticularareaofconcernforthisarticleissection1243:thedemutualizationof availablefromthematurationanddevelopmentsofparallelbankingdemutualizationregula- are virtually eliminated."67 convertingcompany,(3)sharesinacorporationwhichwillcontroltheconvertingcompany, johnhancock 94 securitybenefit 93 carriers. interpreted to mean all current policyholders, this may actually increase the number of office of locke lord bissell & liddell. burdensimposedbymanystates,whichcurrentlyrarelydefeatdemutualizationandonly 65 63 the niadoes not specify which policyholders are entitled to vote.21 indicated that he expects the banking committee to hold hearings on the new bill later this rate transactional matters, including mergers and acquisitions 79 notaffordtheforcedgiveawayrequiredinatraditionaldemutualization.yet,evenifitis federallawsandpromotethecurrentsystemofstateregulation: in the country with assets in excess of $1 billion. in addition, he has advised clients on mat- example,requiredemutualizing-insurerstooffercashforatleasthalfofthedistribution time period.72 bankers insurance association, the financial services forum and the financial services roundtable. holdingpoliciesvaluedat$1,000ormore.theniadoesnotdefineorlimitvotingrights. and equitable." methodofrecognizingpolicyholders'rightsmightbetoestablishaliquidationaccountfor cashorpolicybenefits.whilelessforpolicyholders,thisconsiderationismoreappropri- thertestifiedthatsubscriptionrights,asopposedtocashdistributions,wouldeliminatean the financial services industry for his regulatory/m&a and thrift demutualization practice, years,twenty-twomutualinsurershavedemutualized.theaverageone-yearreturnonthe the modern insurance business holds a commanding position in the trade and com- this avoids having to label or compensate for an otherwise n.y. ins. law�7307(2007). and while a supermajority requirement might reduce 67 29 douglas p. faucette the court, basing its decision in part on the crandalldecision,held: consideration in light of the best understandings of the rights at stake, the public interest, and likely though, under the nia, the whole surplus of the mutual would be distributed fairestandmostefficientproceduralrequirements.thevariancebetweenstatepractices theniadoesnotrequirethenationalcommissionertomakeanyspecificfindings rienced workers, almost as many as seek their livings in coal mining or automobile (or $101.9 billion in 1944-dollars);5 procedural differences in the nia federal banking law requires approval by a major- throughoutthissection):thattheinsurer'sboardisgivengreatcontrolovertheprocess,and the nia would permit the merger of mutual and stock companies during the demutu- nationalcommissionertopromulgatemoreflexibleandefficientregulations. and most state consideration for their membership interests, as required by the statute. we conclude that the policyholders fdcc quarterly/fall 2007 policies,therebylimitingthenumberofbeneficiaries. butfirst,thenianeverdefineswhatthewholedistributionpoolis, would allow the life insurance industry to be more innovative and quicker to respond to its 132 only,andentitleanypolicyholderwho(1)wasapolicyholderatthetimeofdemutualiza- mccarran-fergusonact,15u.s.c.�1011(2007).notethatonfebruary15,2007,senatorspatrick id. however, this is not the purpose of a mutual insurance company. the purpose of a mutual insurance s.40�1243(b)(2)(b). com/news/east/2001/02/21/12297.htm.the"ownersassociation"ranaslateofcandidatesfortheboard, the nia would prevent policyholders, by referendum, from initiating the demutual- questionandtherebydefeatspartofitsintendedpurposeofimprovingflexibility. j.a.c.heatherington,fact v. fiction: who owns mutual insurance companies, 1969 wis. law rev. see,e.g.,goldbergv.philadelphiasavingfundsoc'y,9phila.459,471(pa.c.p.1983)("ifadepositor equitythantheircurrentequitythroughtheiripo.thevarietyinmutualcompanies,from manystatesdefine 74 procedural and distributional burdens currently imposed by many states, thereby facilitat- mutualinsurers.sincethe1930s,over200mutualinsurershaveconvertedtostockcom- thetreasury.theniafinallyfailstoprovideformutualholdingcompanies,anincreasingly is, its policyholders. the magnitude of such a liquidation could be several thousand dollars 138 insurersreturnaportionoftheirprofitstotheirpolicyholdersintheformofdividends, 113 distribution payments to policyholders as capital transactions, and not as dividends from tion, and governed by a board of directors. the policyholders, like shareholders of a stock regardless of whether the interest of the policyholders is greater than a mere inchoate right. has already indicated getting nia through committee is "very realistic." he has already (2007); md. code ann., ins.�3-121(2007);ariz. rev. stat. ann.�20-730(b)(4)(2007). thirty-times the premiums collected in 117 most states by contrast specify each of these procedural requirements by statute. many national regime than a patchwork of state schemes. 80 merce of our nation. built upon the sale of contracts of indemnity, it has become common national process, such as that proposed in the nia, would offer the opportunity to this article does not mean to take a position on the exact nature or certainty of the 36 in the event of a public offering of stock.60 formedtheoptionalfederalchartercoalition cludes these options. the nia excludes other useful and legally supported tools that might prove to be more ameritas 93 phoenixhomelife 95 115 lovell,690f.supp.at1103("thecourtishard-pressedtobelievethatthemainelegislaturewouldhave sharestothemselvesatbelow-marketpricesafterademutualization.grantingpolicyhold- tions,butitwouldbeindirectconflictwithasisterbureau,theots.underthenia,within aloneawell-organizedone.but,itisstillnoteworthythatmercer'sdemutualizationwould first, a policyholder is less likely than a shareholder to understand or value the incidents andcreditunionsbeforetheu.s.securitiesandexchange douglas faucette, mutual insurance company conversions, 1986-2001 (may2006)(onfilewithau- commissioner gave his blessing to the transaction only on being assured there was its liquidation or dissolution, the company's assets would be distributed to its "owners;" that one of the largest and most important branches of commerce. its total assets exceed robert schroeder, senators propose national insurance charter, marketwatch, apr. 5, 2006. commission, the federal and state regulatory agencies and 44 by permitting the national commissioner to discern the best practices among various states of the mutual, like stockholders, then an auction of the mutual to the highest bidder would ohionational 97 woodmenaccident&life 95 but even while the court acknowledged the insurance industry's important place in correct please go to considered in future years as the optional federal charter movement progresses. the nia is liquidation. a mutual insurer, like any insurer, accumulates a surplus and other assets over the nia lowers the thresholds for approval both by the board of directors and by the to such a remote contingency, and when coupled with the fact that it represents nothing which the depositor the congress hereby declares that the continued regulation and taxation by the withdraws from the [mutual] bank, he receives only his deposits and interest. if he continues, his only cyholderisnotinfluencedbytheprofitabilityoftheinsurerwhenchoosinganinsurance centrallifeassurance(amerus) 98 providentmutual 93 permit a simple majority of policyholders voting, as in california, to approve the plan of unum,130f.3d501at511.seealso id. at 515 ("even so, our decision does not rely on the fact that mutual insurance companies (namic) has expressed opposition to the recent legislation, div. 1899), aff'd on opinion below, 62 n.e. 1096 (n.y. 1902)). hadneverdemutualized.40pa. cons. stat. ann.�916-a(d)(west2007). 26 competition. company's equity is an important similarity. converting ownership from policyholders to glenn s. daily, reorganization status of mutual life ins. co.(2006),http://www.glenndaily.com/ company proportional to their respective contribution to the surplus. the remaining assets, conversion,therebylesseninganobstaclefordemutualization. is correct. if the establishment of a single federal insurance regulator, anticipating that federal regulation 37 that permit stock subscription rights and no cash distributions. employed. shareholders also expect dividends, and in fact dividends (theoretically) drive 2 a cash giveaway amounts to a forced liquidation, contrary to case law to date. any dividends, unlike stock companies in certain instances.43 national insurance act of 2007 receiveaminimumamountofconsiderationincash.florida,marylandandarizona,for true owners. tion of the full surplus in the form of cash and equity to policyholders in consideration for growth, and of its transformation from local service businesses which were incidental to the distribution (the surplus) to be the "fair value" of the company, considering its assets and from over a century of existence. former policyholders who have long since terminated 11 turely prohibits options for consideration that might be most equitable. the nia should, theadoptionofanofciswarranted.strongsupportforadoptionofthebillcontinuesto tratedeffortofanothercorporationtoinfluencethepolicyholdervoteisasunprecedented restricting voting rights to only those persons who have been policyholders for at least one 61 tierneyv.johnhancockmut.lifeins.co.,791n.e.2d925,931(mass.app.ct.2003)(citingunum) 57 decades. namic, itself founded in 1895, estimates that mutual insurers underwrite $196 2008roster third, subscription rights are "designed to prevent management from issuing those plans would not likely receive approval by the distribution should have been larger, is also unavailing."). id. ("here, the plan provided policyholders see pehrson, supranote17,at713-14. legal.35 congress entire board of directors."25 (excluding any equity acquired with a preemptive right to purchase stock).61 the problem with either cash giveaways or subscription rights is that they presume what 122 43 versusthe2006version,see"optionalfederalcharterbillreintroduced:proposedalternativetostate in direct opposition to the long-developed legislative and regulatory policies used in thrift states require distribution of the fair value of the company and provide for preemptive rights mutual approval mutual approval 8 and producers. background to insurance demutualization www.thefederation.org policyholder-makeup,areanargumentforflexibility. 3.courtsrecognizepolicyholdersarenotowners ohio rev. code ann.�3913.11(2007). of the treasury) for more than ten years. seealsothedemutualizationofgreenpointsavingsbank,whichobtainedapprovalof75.8%ofvotes regulationspromulgatedbyotsensurethataccountholdersaretreatedequitablybythe mutual companies often promote the unique role of their policyholders as more than offofacombinationoffederalbankingandstateinsurancelaws.itprovidesafirstoppor- old and their assets are the contribution of generations of customers. a liquidation at one estate companies, commercial banks, savings associations todemutualize,ifrequiredtodistributetheirwholesurplus,becausetheycouldnotaseasily are merely inchoate. insurance insolvency is rare since most insurers are among the most timothy s. farber is a corporate attorney with experience corporation, and therefore entitled to dividends, voting rights, and any assets distributed considerable variety of procedural requirements between states, administrative regulations 13 mass. gen. lawsch.175,�19e(2007);del. code ann.tit.18,�4933(2007). findings.ohio,forexample,requiresthestate'scommissionertofindthattheplanwillactu- 15 to provide only subscription rights to the new stock. the nia ex- dependent on taxing insurance companies. proceduralhurdlesassociatedwiththedemutualizationprocessitself,itadoptsanarrowand quirements. strong opposition is still likely to come from state insurance regulators, who are nationalproducts,mutualinsurersarecontinuallyexpandingintonewmarketsthatreflect rights in liquidation. these are certainly incidents of ownership, but policyholders are not national insurance act of 2007 nationalinsuranceact,s.40,110thcong.�1243(b)(1)(a)(2007). 66 ers.moststates,includingforexample,delaware,florida,maryland,andarizona,include simplify the process and remove needless hurdles. policyholders and the mutual. mid-sizemutualinsurers.second,theniawould,quitedivergently,increasetheburdens time:ayearorless,comparedtotwoyearsfortraditionaldemutualizations.butsubscription 109 law" of conversion, unless the nia intends to incorporate state conversion law, which is amountofdistribution.theniatakesarigidpositiononadifficultandinconclusivelegal 127 otherstates,bycontrast,requiremorespecific liquidation. as previously discussed, a liquidation account would be a nominal account received the support of a simple majority of policyholders, but not the two-thirds majority matters. mr. farber counsels companies in a range of corpo- fdcc quarterly/fall 2007 nized.62 flexibility.thecommissioner,notcongress,wouldbeinthebestpositiontodiscernthe 19e (2007); n.y. ins. law�7307(2007). have been successful. but the mercer case is an exception to the general rule. the orches- during2007.see"federalcharteroffersinsuranceoption"byrep.edroyce,may2,2007,availableat interestoftheinsurerorthepublic,evenifitmaximizesthepolicyholders'payout.butan purpose of the pfa, which calculated the amount of assets necessary to pay policy b. nia requirements imply that demutualization is liquidation to the myriad of state regulations.10 to the new stock; remaining stock not subscribed for by the policyholders is then sold in of policyholders voting.26 independentappraiser,withtheactualpriceapprovedbyots.unlikeatraditionalcash distinguishes it from a liquidation in that the insurer is still in business after the inafulldemutualization).italsoprotectsthemfromhostileattemptstotakecontrolofthe stockholdersownthecompany).demutualizationisoftenacomplicatedandlengthylegal national insurance act of 2007 notwithstandingtheinsuranceindustry'smammothsizeandconsiderablegrowth,states ers the option to purchase the shares would probably deter managers, to some extent, from differences between, mutual insurers. 130 ipowas52.6%(median,53.4%),andtheaveragetwo-yearreturnwas63.4%(median, demutualizationoffersseveralbenefitsforinsurers.(1)itimprovesandstrengthens mostpolicyholderswillneverrealize.itisnotlikelythatanypolicyholdervaluessucha mutual company. iv. liquidation.48 edward x. clinton, the rights of policyholders in an insurance demutualization, 41 drake l. rev. held that "the policyholders were not entitled to a distribution of assets, because there was of the treasury, and a commissioner of national insurance. the bill has been met with both therefore,becauseademutualizationcannotbeproperlycharacterized 28 ariz. rev. stat.�20-730(2007);del. code. ann.tit.18,�4933(2007);fla. stat.�628.441 a universal forced cash giveaway of the entire surplus neglects the variety of, and important votes cast) votes cast) preemptively excludes some other forms that may be more fair or more equitable to both ascertained and recovered. . . . the assets belong to the corporation, and no member most states 4.niadoesnotdefine"eligibleperson" two banks merged instead. saul hansell, green point reprimanded for vote action, n.y. times, nov. 25, thrifts is to give depositors subscription rights to purchase stock at fair market value. the illinois, along with pennsylvania and michigan, in contrast with new york and other the consideration requirements. instead, the nia should follow the lead of federal and state despite operating within a locally-regulated patchwork that impedes the development of wouldbetomaximizethesalepriceofthecompany.ifpolicyholdersarereally"owners" 126 56 merger with stock companies; (5) it allows companies to meet competition for employees; manufacturing. perhaps no modern commercial enterprise directly affects so many has gained popularity in recent years. insurance law. vii. 49 churellav.pioneerst.mut.ins.co.,671n.w.2d125(mich.ct.app.2003). rentpolicyholders.thedifferencesbetweenmutualinsurers,reflectedintheirage,size,and other forms of consideration. the nia windfall scheme awkwardly sets the new national insurance commissioner 657, 685 (1992). but many insurance agents and state regulators remain opposed. the nationalassocia- itdoesnotdefine"eligibleperson." realizeduponliquidation,aliquidationaccountpostponesanydistributionofassetsuntil fdcc quarterly/fall 2007 establishing mutual holding companies (mhcs).80 the most troubling position taken by the nia respects the consideration owed to see clinton, supranote31,at687-88. trillion annually4 30 erswillapproveademutualization."31 timothy s. farber fdcc quarterly/fall 2007 basedontheu.s.federalreserveinflationcalculator,http://minneapolisfed.org/research/data/us/ the bill would, among other things, 59 national insurance act of 2007 (basedonthecompany'spre-demutualizationworth),asifthecompanyneverconverted; to that equity from the original shareholders. that is, subsequent shareholders essentially insurer who would otherwise inherit it. the value of a mutual insurer is accumulated over unumcorp.v.unitedstates,130f.3d501(1stcir.1997)certdenied,525u.s.810(1998). and update your this article argues that the nia would provide a unique opportunity to lessen the in addition to dividends and enfranchisement, policyholders also receive a right in menttopolicyholders'rights.nearlyeverydemutualizationplan,toeitherastockcompany insurance companies. insurers seeking to offer a new product must receive approval from 58 requiredbypennsylvanialaw.underthenia,mercer'sattempteddemutualizationwould isinconsistentwith,andevenopposedto,thedemutualizationpositiontakenbycongress eight industry trade associations11 most of the policyholders' rights while converting to stock ownership. fromholdingstatelicensessimultaneously.stateswouldberequiredtorecognizethefederal and therefore what a "portion" means. and second, it is meaningless to refer to "applicable voting provisions are not an effective protection for policyholders because most policyhold- property and casualty to life, and from large to small, means each company has a different fdcc quarterly/fall 2007 (4)premiumcredits,(5)enhancedbenefits,and(6)creditstolifeinsurancepolicyaccount thedemutualizationprocessandmakeitamorerealisticoptionformanymutualinsurers. 1944, the industry has since grown immensely more.american insurers now collect $1.094 demutualizationterminated. provided so explicitly for the protection of an interest as valueless and negligible as defendants claim.") however,theniaissilentonmutualholdingcompanies.amoreliberaldemutualization equity.italsodecreasestheadministrativecostofthedemutualizationprocess,sincethere press release, nat'l ass'n of ins. comm'rs, statement from the naic president alessandro iuppa on policyholders in a mutual company that remains in mutual form. there are, generally, two manystatescurrentlydefine"eligibleperson"differentlythanjustcurrentpolicyhold- second, alternatively, if one takes the view that policyholders are absolutely like stock- trol over a company, vis-�-vis director elections is both widely understood and increasingly unintentionally)theconversiontoamutualholdingcompany:apartialdemutualizationthat 52 mutual holding companies time. many insurers have accumulated billions of dollars in value. in the unlikely event of sideration for extinguishing his or her membership,76 for policyholders and foreclosing potentially fairer possibilities. following new york and fdcc quarterly/fall 2007 practices and promulgate regulations that are fair, equitable, and in the national interest, event of liquidation, policyholders would receive a share of the assets of the company finally, the theoretical rights of ownership may differ between life policyholders and again,animportantgoalofdemutualizationistoraiseequity.mutualinsurersexpectto introduction izationprocessrelativetocurrentstateregulations.first,theniawouldlessentheprocedural ing. it is also important to note that the surplus and other equity of a mutual insurer, like to policyholders, following state precedent. california currently requires the total pool for thriftdemutualizations.therein,policyholdersareonlyprovidedwithsubscriptionrights insurer or to the national interest. and ironically, while the procedural requirements of the 23 54 coalition believes that because changes in technology and economics have resulted in the b. nia vests commissioner authority to promulgate procedural requirements 119 each has negative returns. any person who is or has been a policyholder within the last three years.77 18 their forced consolidation by stock companies bidding up their market price, is not in the demutualizations.inthe1970s,congressandthefederalhomeloanbankboard(the mhc,theniaoffersonlytwoextremes:fulldemutualizationaccompaniedbyagiveaway 75 c. vote required for board approval and by policyholders is less the state's commissioner.20 "slightly" the odds that a conversion plan that is otherwise unfair or disadvantageous to iii. 70 national insurance act of 2007 alization.39 arefirstlycustomers. they purchase policies at a market price. most telling is that the poli- includingtenureasthedirectorofthesecuritiesdivisionatthefederalhomeloanbank federal insurance bill (apr. 16, 2006). of the plan by the board to all policyholders.18 metlife 93 sunlifeofcanada 98 venture financing, mergers and acquisitions, and the structuring of executive and employee ill. comp. stat.tit.215,�5/59.1(2007). 1993,atd5;saulhansell,regulators thwart plan for big payouts in bank conversion, n.y. times,jan. generally, the niapresents an attractive opportunity for the new national commissioner and begin dialogue about the details of a federal regulatory scheme. policyholders, to only a simple majority of votes cast.24 to current policyholders. this would exclude policyholder who only recently ended their in regard to thrifts, and it would pit the new national insurance commissioner in direct are not necessarily any more entitled to the whole surplus than the shareholders and stock rightsexist,andwhatthedemutualizationmeans(changeinform,orliquidation).rather d. commissioner would have considerable flexibility to approve or reject plan. in a wide range of corporate and transactional matters. his involved. 42 board (the predecessor of the office of thrift supervision, a bureau of the u.s. department portplaintiffs'positionthatafailuretodistributeexcessprofits,withoutmore,isanabuseofdiscretion,our its members include the american council of life insurers, the american insurance association, the partbythenia,encouragescashgiveawaystopolicyholders.traditionaldemutualizations are at issue? ill. comp. stat.tit.215�5/59.1(2007). account would defer, and therefore mute, the ex ante nature of policyholders' interests in themutualinsurercouldestablishaliquidationaccount,asusedinthriftdemutualizations, many of the same requirements already required by most states, it is hoped that the nia's cal. ins. code�11537(2007). the whole surplus, or just a portion of the surplus, to be distributed to policyholders. the that consumer protections would suffer if a federal role in insurance regulation results in a fdcc quarterly/fall 2007 com. 135 therehasbeenoneattempteddemutualizationthatwasrejectedbypolicyholders,but id.afteroneyear,onlyphoenixcompanies(-7.7%),miixgroup(-11.6%),andunumcorp.(-12.2%), ance co., a longtime partner of mercer, offered to buy mercer, which offer was rejected.33 id. (dismissing a claim to compel dividends from the excess surplus) ("while [dodge], appears to sup- provalfromjustonenationalregulator."consumersshouldhavethebenefitofthegreatest international comparisons: insurance: summary16,insurance:citybusinessseries,financialservices can readily transfer, any theoretical value reduces almost to the vanishing point."). 137 n.y. ins. law�7312(2007);md. code ann., ins. �3-121(2007). could convert to a national insurer in stock form in one step. calc/. 19 company. if a stock company's value grows, thanks in part to the equity contributions of equitable principles involved. but it is an important area of emerging law, as more and more without other limitations, and permit the state commissioner to judge its merits.59 but the nia is yet improvable, especially concerning the requirements for consideration. boththenationalcommissionerandtheotswouldbehousedwithinthesamede- that insurance, one of the nation's largest industries, would be better regulated under one institutions, then bank board chairman thomas r. bomar declared that "[a]n equitable some states also limit voting rights based either of this sort of behavior or of markets to accommodate this sort of sophisticated consumer demand. this is administratively simpler than the traditional approach, and in- the national association of insurance commissioners (naic) claims that the nia would bill in the house is h.r. 1081) which would repeal the federal antitrust exemption in the mccarran-fer- significantimprovement. just liquidation. charter."12 to policyholders under their insurance contracts. notably, the maine insurance nationalcommissionerwouldpromulgateveryspecificrulesregardinginsiderpurchas- iowa and new york limit voting rights to those persons who were policyholders massachusettsanddelawarerequiretheircommissionertofind lation of assets. unlike policy prices, share prices increase with the increasing value of a nia poses by prematurely foreclosing the debate. asdelawareandarizona,evensubjectthepolicyholder-voting-proceduretoapprovalby it is not obvious, though, whether the nia requires uidation, or just a change in the form of ownership? tion, and (2) continues to be at the time of liquidation, to a portion of the assets of the 134 110 the creation of an mhc changes the (2007). demutualizationisamicrocosmoftheindustryitself.theconversionfromthetradi- fdcc quarterly/fall 2007 its policyholders, and the state insurance commissioner. and while the nia would impose arightinliquidationonlyvestsuponliquidation;soisdemutualizationatypeofliq- remote probability, and such value would be discounted greatly based on the improbable the board, wisconsin requires a simple majority, and new york requires a "majority of the and loans.75 federal silence and state dominance (which is the goal of the act), the requirements with respect to the amount, type and degree of stock in a new, subsidiary stock insurer; a minority interest in the new stock company is vi. elsetheywouldnotdemutualize.butthelikelihoodofstockgainsisnotasufficientexcuse that the plan will not create any "unfair advantage" for the managers of the company.38 excluding contingently repayable funds and outstanding guaranty capital shares at taindemutualizationrequirementspertainingtothedepositors.atroubledcompanycould plytothedemutualizationregardlessofitsform,evenifunionmutualdistributedstockinthenewstock itisalsonotclearthatanypremiumspaidforarightinliquidationreflecttheaccumu- in state residual market mechanisms. this had been a chief concern among states, whose tax base is partly tothegoalsofthedemutualization(raisingequity),publicpolicy,ortaxconsequences. additionalflexibilitywouldalsoallowthenationalcommissionertoaideandaddress s.40�1243(b)(2)(c);n.y. ins. law�7312(e)(2)(2007);mass. gen. lawsch.175,�19e(2007). 1.theniadoesnotdefinethetotalpoolfordistribution share price. but policyholders less obviously understand their incidents of ownership; they has been eminently successful."7 lastyears'versionofthenianevergainedsufficienttractiontoreceiveanupor policyholderisquiteinsufficienttosustainan...actionbroughttopreventthe buy the contributions of their predecessors. but second-generation policyholders do not hasmorethan30yearsofexperiencerepresentingpublicly the court granted summary judgment second-generationrightsaregreaterthanfirst-generationrightsbecauseoftheincreasing popular option for many mutual insurers. therefore, while the nia is a worthy and needed the niaempowers the mutual, in its plan, to author a "fair and equitable formula" 40 fortaxpurposes,theirsandthefederalcourtshavetreateddemutualizationand see,e.g.,12c.f.r.�575(2007). per policyholder. laws count only those votes cast, and not those outstanding. 60 push for massmutual demutualization, ins. j., feb. 21, 2001, availableathttp://www.insurancejournal. rights would not be available under the nia. anduniquecapacityandaccesstocash.mid-sizemutuals,forexample,wouldnotbeable benefitpolicyholderswithimmediate,tangiblepayouts,oftenintheformofcash,paidout similarlyasastockcompanydistributesprofitsindividendstoshareholders.butcourtshave settingasidetheissueofdemutualization,itisimportanttounderstandtheroleof the u.s. congress. in the past decade, he has been involved thetraditionalapproachforconsideration,exemplifiedbynewyorkandadoptedin thebillitselfiscommandinginitslengthandspecificity:arobust330pages,modeled thor). premium.anauction,whichwouldresultinopenseasononprofitablemutualinsurersand dation,andtheyaffordpolicyholderssignificantrightstothesurplusofthedemutualizing yet, under most state laws, and presumably under the nia, policyholders who are members & demutualization of insurers: 71.4%).71 under a cash windfall scheme, by contrast, "the entire structure of the savings and a. only board could initiate process; not policyholders agents are worried they will be subjected to dual federal and state licensing re- lation of insurance. while this particular act, like those before it, will not likely become national insurance act of 2007 another novel approach foreclosed by the nia's rigidity is the use of liquidation accounts. mostdemutualizationplansarenotmetwithanyopposition,let (forstatechartedsavingsbanks,thefdicappliestheotsregulations.)the and(6)itpermitsintegrationoffinancialservices.accordingly,andnotsurprisingly,more concerned with public policy and providing affordable insurance, suggest the nia prema- basedupontheinsurer'sentiresurplusasshownbytheinsurer'sfinancialstatement alternative to state insurance regulation returns for another round,june21,2007,www.lordbissell. 133 servetofrustrateandlengthentheprocessandtoactasabarrierforthedemutualizationof 78 stockholders' rights, or rather a inchoate interest in liquidation, will determine the proper as the failed vote itself.34 referendumthatwouldcompeldemutualization,whentheboardwasotherwiseunwilling.policyholders eachhadnegativereturns.aftertwoyears,onlyphoenix(-30.8%),miix(-27.1%),andreliastar(-38.7%), 71 every conversion and every converting mutual is unique. an older mutual will have affordable coverage to its members.42 significantwindfallforthosepolicyholders. commonincidentsofownership:(1)thedistributionofdividendsand(2)theelectionof theniamakesstridestowarduniformity,efficiency,andflexibilitywhichwillimprove productsandservicesacrossallfiftystates. unintentionally,theircourtstorecognizethepolicyholders'rightsasmorethananinchoate tionofprofessionalinsuranceagents(pia)ceoleonardc.brevikstatedwhenlastyear's national insurance act of 2007 35 lengthy, and costly. it generally requires the consent of the company's board of directors, not clear. oftheequityraisedintheipo.thesignificantcostofadministeringacomplexformulaof most equitable regulations. it also affords the chance to consider and promote the national under nai, these requirements and practices could be easily plans with ninety-percent majorities. national insurance act of 2007 subscription rights based on the amount of deposit, pro forma stock price estimates, and itisnowonderthatpolicyholdersapprovedemutualization as a liquidation, it should not induce distribution of assets to policyholders based on their suitablefordemutualization.subscriptionrights,usedinillinois,areattractiveoptions a plan is "fair and equitable" will be set forth in regulations. this, like the banking law, pro- whether one views policyholders' "ownership" rights as a property right, on par with 47 holder would have purchased the surplus contribution of previous policyholders.) but given the novelty toinitiallybleedthemdry,especiallywhenmanymid-sizeinsurersmaynotraisemuchmore form"remainsmateriallyunchanged.forhighlightsofthesignificantdifferencesbetweenthe2007bill unumstructureditsdemutualizationthroughaholdingcompany.sections354(a)and1032(a)wouldap- only highlights that more examination is needed. delegating regulatory authority to the the firm's washington, d.c. banking practice. mr. faucette co.,46 www.thehill.com. 121 distributionsmaybecalleddividends.thisreorganization,thecompanysays,is 38 fla. stat. �628.441(2)(g)(2007);md. code ann., ins.�3-121(2007);ariz. rev. stat.�20-730 of state regulation, often referred to as a "patchwork quilt," has frustrated many national manyinsurancedemutualizationsamajorityofpolicyholdersdidnotvoteatall.california 53 starting place for the discussion of federal insurance regulation, it is not without room for chartered under the nia would be subject to one set of national regulations, and not subject 72 national insurance act of 2007 25 cast even though another bank had announced an offer to pay depositors $250 million in interest if the there is not one, singular solution; much can be said for both cash giveaways and sub- ofinsurancedemutualizationandtherarityofliquidation,itisunlikelythatanypolicyholderincluded niadefines"rightsinsurplus"withrespecttoeachpolicyholder's"portionofthesurplus," 131 have been approved under the nia standard, demonstrating that the nia makes even an at the time of demutualizationreapthebenefitofdecadesofvalue-building.thiscanbea while a policyholder coup is not a likely scenario absent the nia provision, the future. this does not happen in the usual liquidation and, indeed, demonstrates an inchoate interest in the account, equal to their deposits at the converted bank, that vests if the new bank in re metlifedemutualizationlitig.,322f.supp.2d267,271(e.d.n.y.2004). to policyholders in multiples of fair market value because of the inclusion of a control finally, while the nia requires that the plan provide "each eligible person" with con- surers were the dominant form of insurance company because of their policyholder-focus. 3couch on ins.3d�39.43. 9 s.40�1243(d).thisissimilartohomeowners'loanactof1933("hola"),12u.s.c.��1461et replace it all on the equity market as a stock company relative to a larger mutual. therefore, liquidation, receive only subscription rights (and sometimes liquidation accounts),64 [the] best argument may be the analogy [union mutual] draws between a mutual policyholders would receive the contribution of thousands of former policyholders. continue to provide the vast majority of laws regulating the industry. the current system equaltothefairvalueofthecompanyatthetimeofthedemutualization.intheunlikely compensation. previously, mr. faucette served in various senior governmental positions, insurers that choose to retain their state charters would amounts to "a windfall resulting from the increase in the value of that policy arising from 12u.s.c.�1464(i)(2007). versiontotheofficeofthriftsupervisionforfederallycharteredthriftsandstatesavings majority approval by the board. for example, rhode island requires a two-thirds vote of be in all parties'interests as the only or best way to salvage the company. the rigid statutory second, mutual insurers are not likely to liquidate, and therefore rights in liquidation been willing to pay more for his policy, after incorporating the small probability that his mutual would please check your listing in the 2008 biographical roster information. values.58 corporate practice focuses on general corporate law, mergers 124 andfinally,somestatesentitlepolicyholdersto 45 thereby affording them rights to assets in the company in the unlikely event of liquidation, as if the company 20 21 maximizepolicyholders'interests.anauctionapproachwouldlikelyresultindistributions and foreclose options in the forms of consideration available for policyholders in exchange id. at 87. (internal ellipses omitted) (quoting grobe v. erie county mut. ins. co., 57 n.y.s. 290 (app. use of a subscription right, a legally-supported and preferable scheme of distribution. this of members now, and verify that all of your information company is to provide affordable insurance coverage to its members.") id. at 27. (citing dodge v. ford contendingthatitwouldhurtconsumersandinsurers,inparticularsmall-andmedium-sized 33 policy,thatdemutualizationsshouldnotbeconsideredliquidations,andshouldbedone ins.co.,134n.w.999(mich.1912)). lovellv.onebancorp,690f.supp.1090(d.me.1988)(citing12c.f.r.�563b.3(f))("theliquidation theauthorswouldliketothanklockelordbissell&liddellsummerassociatemitchholzrichterfor for [the mutual's] directors and to share in the assets of [the mutual] in the unprecedented accumulatedafterdemutualization,wouldbedistributedtothenewstockholdersatliquida- thiswillsignificantlyaffectwhichpersonsareentitledtoreceivethedistribution. distribution pool. federal regulation will look like. more importantly, it provides a chance to steer the debate less than true ownership. in crandall v. alderfer,45 would permit the national commissioner to discern the best practices and what is most "fair states are split as to whether a mutual insurer can merge during its conversion, oncompletionofthedemutualization.therearetworesponses.thefirstisthat lessening of the current state regulatory constraints on rates, forms and market conduct.13 12c.f.r.��563b.225(b),544.1(2007).depositorsaregiventherighttoapprovetheplanbyamajority therefore, the policyholders, in addi- reliance on administrative regulations (rather than statutory requirements) would permit the mass. gen. lawsch.175,�19e(3)(2007). n.y. ins. law�7307(2007). presumably these procedural requirements would be established by regulation. given the liquidation and bestowing a windfall upon policyholders. as previously discussed, it is not industry.69 receives dividends after premium payments are stopped, whereas a property or casualty id.�1241(9). corporationfromdoingwhatthestatuteauthorizesittodo."47 regulation will provide less costly coverage and encourage competition, by requiring ap- tion. the liquidation account would exist until all of the policies that existed at the time of on the part of the congress shall not be construed to impose any barrier to the thegoalofdemutualizationistoraiseequitywhilefairlycompensatingpolicyholders;the butinpractice,theincidentsofownershipareneithersignificantlyvaluablenorlikely courtshavelongrecognizedthatpolicyholdersarebothinsurersandinsureds.41 stockholders would receive the remaining liquidated assets of the company. a liquidation 3 whichissignificantlymoredifficult,sincein n.y. ins. law�7102(2007);mass. gen. lawsch.175,�19a(2007);cal. ins. code�11535(d)(2007), first, the board of directors of the mutual company can issue dividends. most mutual 31 [the] policyholders in redemption of their equity interests in the company."49 before approving the plan, except that the plan is "fair and equitable" and that it is not il- partment of the treasury, regulating very related industries, but yet enforcing very different their subscription rights receive nothing immediately, except a liquidation account. 77 and purchases and sales of assets, and has assisted with the were not entitled to a distribution of assets, because there was no liquidation."). id. traditionalschemes,modeleditsdemutualizationplanonfederalandstatelawsthatgovern the corporation. (2007). its unforeseen restructuring."66 completely liquidates after converting. to establish a liquidation account, the new bank must segregate manufacturers life (manulife) 98.5 security mutual life of nebraska 96 4.isdemutualizationliquidation,ormerelyownershipchange? evolves, without foreclosing any possibility by statute. onthevalueofthepolicies.arizona,forexample,enfranchisesonlythosepolicyholders statutesthataretoospecificintheirrequirements,suchasthoseusedbymanystates,leave andprivatelyheldcompaniesinavarietyofcorporateand recognizedthatforamutualcompanytheissuingofdividendsissecondarytoproviding tax law. second, stock is often more valuable in the long-term than cash. in the last twenty timing and chance. s.40�1243(b)(1)(c). still other allybenefitthecompany.37 6 within the insurance industry, as well as a crowded legislative agenda, adoption of the nia 39 ofconversion[demutualization]canbeconsideredequitableunless`windfall'distributions massachusettslaw,theniaspecifiessixformsofconsideration:(1)cash,(2)sharesinthe during the last decade. included in the labor force of insurance are 524,000 expe- (theniacashgiveawayschemeandtheotssubscriptionrightsscheme),eachignoring the nia, like most states, requires a mutual insurer to distribute its surplus to members s.40��1243(b)(1)(a),1243(d). asopposedtodefiningthembystatuteintheniaitself,willimprovebothefficiencyand only those persons who are current policyholders.79 5 the policyholders will be approved,32 viii. loan industry could be radically transformed through speculative conversions."70 many more equitable options. agreed,andenactedthecurrentbankingscheme,whiletheotspromulgatedregulations thenconverttoanationalinsurerinstockformundersection1943;orastatemutualinsurer name. indeed, ensuring that union mutual would continue to meet its policyhold- persons in all walks of life as does the insurance business. insurance touches the process might decrease the incentive to form an mhc (and instead increase the incentive 112 massachusettsrequiresthatdistribution: eachofthefiftystateregulatorsindividually.senatorjohnsonbelievesthatoptionalnational payouts, combined with the payouts themselves, mean that a mutual will raise little new bution options available to insurers and policyholders. it particularly neglects to include the 34 practices found in wisconsin companies."). id. at 1080. arguably, a sophisticated policyholder might have nationalcommissionerpermitstrial,error,andrevisiontoaninsurancedemutualization or do pay, an added premium for the "value" of voting for directors, dividends, or the pos- related matters before the subcommittee on financial institutions, committee on banking, housing and likemostofthebill,section1243entitled"conversionofmutualinsurertonationalinsurerinstock three-fourths of policyholders voting.27 id. of conversion. the fair market value of the stock is based on a pro forma estimate by an several states of the business of insurance is in the public interest, and that silence 1999 u.s. dist. lexis 2422 (e.d. pa. 1999). property and casualty policyholders. a whole life policyholder still maintains an asset and therefore mutual insurers are not compelled to issue national insurance act of 2007 tion to the expected value of the insurance product, now receive payouts that they had not see e.g. ill, pa state laws. support and opposition within the insurance industry.9 insurer. this weakens the goal of raising equity, and is neither fair nor equitable to the 118 conversion is complete. in the present case, the policyholders continue to be pro- securities transactions. he has represented financial services extinguishingtheirrights.thesubscriptionapproach,exemplifiedbyillinoislaw,treatsthe in 1944, one year before the passage of the mccarran-fergusonact, the supreme court insurer when purchasing their policy. it is not necessarily true that they are willing to pay, among the most common and fair practices used currently by the states. burdensomepositionthatdemutualizationisliquidation,anditaccordinglylimitsthedistri- level. the american council of life insurers (acli), continues to be a strong advocate for no liquidation."51 1966. the number of votes cast in the election of directors in 1966 was 25 and 19 . . . . there is no reason ofparticularconcerntomutualinsurersisniasection1243,whichprovidesthe liquidationaccounts.theregulationsareamendablebyotsastheindustryandpractice theniaadoptsthenewyorkapproach,therebytreatingthedemutualizationasa 48 licenses and not interfere with the business of a national insurer. insurers that choose to be 10 but does not, permit exploration of the use of liquidation accounts, subscription rights, and development of large, national insurance companies since mccarran-fergusonact of 1945, tivetomanystatelaws.traditionally,thedemutualizationprocesshasbeencomplicated, these companies is a direct product of their longevity, having accumulated billions in value fdcc quarterly/fall 2007 therefore, policyholders are owed some form of recognition of their rights. but what rights 27 vided insurance, albeit through a different form of company and under a different under a fair and reasonable formula approved by the commissioner, . . . shall be buildings in the united states. its annual premium receipts exceed $6,000,000,000, ("ofc")tosupportthemeasurewhenaverysimilarbillwasintroducedin2006.the videsflexibility,andpermitsthecommissionertodiscernthebestpracticesoftheindustry. thisdoes,however,flagtheroleofstatelaw:theniaisnotclearinwhetheritintendstocompletely ers' reasonable expectations on the investment value of their policies was the very policyholders.whiletheactaffordsthenationalcommissionersignificantflexibilityto to suppose that voting patterns and practices in the mutual insurance industry differ appreciably from the national travelers 94 western & southern life 94 41 see, e.g., r.i. gen. laws�27-1-40(2007);wis. stat. ann. �611.76(2007);n.y. ins. law �7307(b) "amemberof[amutual]corporationhasnodefinitepropertyinterestwhichcanbe pennsylvania(fromnewjersey)in1998,inordertodemutualize.franklinmutualinsur- sets of the company turns an inchoate liquidation right into a property right, without regard the process is varied from state to state, and there is ambiguity about the legal and cal ins. code�4097.04(a)(2007). sibility of a right in liquidation.44 gal"? insurancecompanyliquidationanddemutualization.whenamutualinsurance guson act. see "will katrina's winds blow away mccarran's antitrust exemption?" published april 4, unabletomakedistributiontoitsaccountholdersorpolicyholders,demutualizationmight since the rights of policyholders to the assets and surplus of the company are only funds equal to its net worth at the time of conversion.") id.at1093. therearetwostateapproachestoconsideration.thetraditionalapproach,exemplified the mutual company until an actual liquidation and additionally provide policyholders with relying on the national commissioner to establish regulations as to voting rights, under applicable law."53 many states simply require that the plan's consideration forms be fair and equitable, and florida, even subject the notice to approval by the state's commissioner.19 preemptstatelaw,sowouldviolatingastateprohibitionondemutualization,asinnewjersey,be"ille- seetimothyfarber,johnhrebec&michaeltrier,optional federal charter bill reintroduced: proposed chance of getting anything more would be in the unlikely event of a solvent liquidation, a possibility that supremecourtalsonotedthatthepurposeofabusinesscorporationistoprovideprofittoitsshareholders. younger mutual will, by contrast, have more assets that are entirely the contribution of cur- incentive for speculation or forced conversions, and thus promote greater stability within the process, which requires a balancing of policyholders' interests and future stockholders' in- mental capital, and does not require them to distribute surplus assets to policyholders (as paymorefortheirrightsinliquidationthandofirst-generationpolicyholders,eventhough companies, including insurance, investment banking and real statementofthomasr.bomar,chairman,federalhomeloanbankboard,ons.3132,s.3224and equity. cepted franklin's offer. franklin garnered enough proxy votes to reject the plan. the plan mutualizationwasanillegaltaking.similarly,intancredi v. metropolitan life insurance distributing the whole surplus is worthy of further study and concern. the premise is one of the few states that requires only a simple majority of votes cast.29 company, elect the directors. but elections are not dispositive evidence of true ownership; financing matters. he currently practices law in the chicago the state commissioner with too little discretion to determine what is fair for all parties just customers. many mutual insurers even refer to their policyholders as "owners," and their membership have contributed to its present value. current policyholders are no more most states typically require super- introduced by the same two senators only a year ago.8 the nia would permit the new commissioner of national insurance to issue federal national commissioner anyway. economy to national corporations which drive the economy. many mutual insurers believe bankingstatutes,which,unlikemoststateinsurancedemutualizationregulation,donot in the passage of all major financial institution legislation consumer.14 momentintimewouldbeabenefittothosepolicyholderwho,bychance,arepolicyholders billion in property and casualty policies in the united states.56 requireanyspecificamountorformofconsideration(ortheoreticallyanyconsideration policyholdersofmassmutualformedthe"massmutualownersassociation"topushforapolicyholder each policyholder. rather than determining ex ante the rights at stake or the distribution pool, it illustrates a larger theme of the nia (described federal banking law, now permit mutual insurers to partially (rather than fully) convert, by states require insurers to give reasonable notice of the plan and the approval process.17 but the nia permits states to tax national insurers operating therein, and to require their participation ii. seepehrson, supra note 17, at 716; del. code ann.tit.18,�4933(b)(5)(2007);fla. stat. �628.441 has any interest in any aliquot part thereof, and the unascertained interest of a mere 16 national insurance act of 2007 national insurance act of 2007 representation of issuers and underwriters in debt and equity theanalogydoesnotwork.theverynatureofademutualizationfundamentally fdcc quarterly/fall 2007 ters relating to private and public securities offerings, including initial public offerings and ity of outstanding votes eligible to be cast,28 regulation or taxation of such business by the several states.3 seq.,whichcreatedmutualsavingsandloansbutwassilentastovotingrights.theotsfilledthevoid policyholder does not. arguably, a life policyholder might have a greater claim to owner- at all).74 mr. faucette has been involved in the demutualization of almost every savings institution year. however, given the continued controversy over this legislation and the deep divisions mhctable.htm. regulators, and in this case the national commissioner, should determine the best forms of would have been approved under the nia. mercer mutual insurance co. redomesticated in fla. stat.�628.441(2007);ariz. rev. stat.�20-730(2007);del. code ann.tit.18,�4933(2007). thatpolicyholders'abilityeithertoinitiateortopreventdemutualizationisdiminished. for extinguishing their incidents of ownership. third, the nia neglects to include (perhaps sold to raise equity. mostrecentlyfiledwiththecommissioner...,includingallvoluntaryreservesbut york, for example, requires that the mutual insurer give "prompt notice" after the adoption organizedoppositionmovementlessplausible. and acquisitions, securities, banking and insurance regulatory inthisareaonstatelaws--andspecificallyononesetoftraditionalstatelaw--todictate established by regulation, thereby permitting the national commissioner to choose from company in direct exchange for the membership interests of its policyholders.") ate:policyholdersreceiveoneformofownership(stock)inexchangeforanother(rightsin leahy, arlen specter and trent lott introduced the insurance industry competition act (s. 618) (the same of ownership. a shareholder generally understands his or her ownership. shareholder-con- press release, nat'l ass'n of prof'l ins.agents, piamembers blanket capitol hill in effort toassure there are three important areas of interest in the niawhich would change the demutual- butthedemutualizationprocessisexpensive,lengthy,andvariedfromstatetostate.a lordbissell&liddellcorporatedepartmentandisheadof holders,permitproxyormailvoting,ordefinethepolicyholderswhoareeligibletovote. predecessortotheofficeofthriftsupervision)found,asamatteroflawandgoodpublic accountiscreatedforthebenefitofdepositorsandestablishesapriorityforliquidation.depositorshave in his testimony before the senate subcommittee on financial insuranceregulationreturnsforanotherround,"publishedjune21,2007bytimothyfarber,john new 17 liquidate or convert, and thereby owe him a portion of its otherwise-withheld surplus (i.e., a new policy- for acquisitions, since stock would be available as an acquisition currency; (4) it enables chairman bomar fur- ingdemutualization.theniashouldpermitanationalcommissionertodiscernthebest rights in liquidation. s. 40, the national insurance act of 2007 (nia). the nia is very similar to legislation arizona,delaware,florida,andmarylandrequireapprovalby functionally equivalent to such a liquidation because union mutual no longer exists the mhc is a popular option for mutual insurers. it allows the mutual to raise incre-