RS C.S.H.B. 2842 75(R) BILL ANALYSIS INSURANCE C.S.H.B. 2842 By: Brimer 4-23-97 Committee Report (Substituted) BACKGROUND Chapter 15, Insurance Code, sets forth incorporation and other requirements for non-life mutual insurance companies (property and casualty mutual insurance companies.) Mutual life insurance companies are authorized to convert to stock life insurance companies, pursuant to Article 11.01, Insurance Code, but the statutes do not currently allow property and casualty mutual insurance companies to convert to stock insurance companies. Other states allow conversion of property and casualty mutual insurance companies. Mutual insurance companies and stock insurance companies are governed by the same rules in most respects, such as solvency requirements, guaranty fund requirements, enforcement provisions, and taxation. Mutual companies, however, cannot raise capital as easily as stock companies due to the lack of access to capital markets and cannot employ the use of a parent holding company for purposes of raising capital through the issuance of holding company stock. PURPOSE Conversion of a mutual insurance company to a stock conversion company allows the company to raise capital, which enables the company to grow and compete in the marketplace. Allowing conversion also minimizes the risk that Texas-based insurance companies will move to other states to take advantage of the other states' conversion laws. RULEMAKING AUTHORITY It is the committee's opinion that this bill does not expressly grant any additional rulemaking authority to a state officer, department, agency or institution. SECTION BY SECTION ANALYSIS SECTION 1. Amends Chapter 15, Insurance Code, by adding Article 15.22 as follows: Article 15.22. CONVERSION TO STOCK INSURANCE COMPANY Sec. 1. DEFINITIONS: Defines "Conversion plan," "Converted stock company," "Eligible member," "Mutual insurance company," "Participating policy," and "Stock company." Sec. 2. ADOPTION OF CONVERSION PLAN. (a) For a mutual insurance company to convert to a stock company there must be an affirmative vote of two-thirds of the board of directors. A mutual insurance company may not engage in insurance as a stock company until this is achieved. (b) Before the eligible members of a mutual insurance company may vote on the conversion, the company must comply with section 3 of this article. Sec. 3. PLAN INFORMATION FILED WITH COMMISSIONER; COMMISSIONER POWERS AND DUTIES. (a)Within 90 days of adoption of a conversion plan a company must file with the commissioner: 1) a copy of documents relating to the conversion plan; 2) The notice as prescribed by Section 5 of this article; 3) the form of proxy to be solicited from eligible members under Sec. 6(b) of this article; 4)Form of notice required by section 16 of this article; 5)the proposed, amended, or restated articles of incorporation; 6) a statement regarding acquisition of control of the converted company; and 7)other information requested by commissioner. (b) The commissioner shall approve or disapprove of this plan within 60 days after these papers are filed. The commissioner may extend this period by 30 days with written notice to the party involved. The commissioner may extend the time by an additional 60 days only if he finds it necessary to retain a qualified expert pursuant to subsection (d) of this section. The commissioner must provide written notice of his decision, and reasons of disapproval. (c) The commissioner will approve the plan if it complies with this article, if the plan is fair and equitable, and the converted company would satisfy the current requirements applicable to a domestic stock company. (d) The commissioner may retain a qualified expert who is not a part of his staff to assist in reviewing the conversion plan and independent evaluation of the pro forma market value required under this article. (e) The commissioner may hold a hearing on whether the conversion plan complies with this article after providing notice to the company and parties involved. Sec. 4. AMENDMENTS; WITHDRAWAL OF PLAN. A conversion plan maybe amended or withdrawn by a two-thirds vote of the board of directors prior to it becoming effective. Sec. 5. - NOTICE TO ELIGIBLE MEMBERS; COMMENTS. (a) A mutual insurance company will notify eligible members of the adoption and filing of the conversion plan within 10 days of filing the required documents with the commissioner. Notice must include procedure for making comments. (b) An eligible member who wishes to make comments must do so in writing within 30 days of mailing of the notice. (c) Within 60 days of approval by the commissioner, the company shall send notice of the members meeting to vote on the conversion plan. (d) If the meeting is held during the companies annual meeting of policyholders a combined notice may be used. Sec. 6. - ELECTION ADOPTION OF PLAN. (a) A conversion plan is adopted upon receiving the affirmative vote of two-thirds of the members eligible to vote. (b) Members entitled to vote on the conversion plan may vote in person or by proxy. The number of votes shall be determined by the company's bylaws. (c) Members shall also consider the amended bylaws at the meeting. Two-thirds vote is necessary for adoption. Sec. 7. - FILING BY CONVERTED STOCK COMPANY. A company shall file with the commissioner: 1)the minutes of the meeting at which the plan was adopted; 2)the amended or restated bylaws and articles of incorporation within 30 days after adoption of the conversion plan. Sec. 8. - REQUIRED PROVISIONS IN GENERAL. (a) Each conversion plan must include provisions required by this article. (b) Each policy in effect on the effective date of that policy remain in effect except for voting rights of policy holders provided under the policy, and aspects relating to subsection (c) of this section, and any assessment provisions provided under the policy. (c) The holder of a participating policy in effect on the date of conversion continues to have a right to receive dividends as provided by the participating policy. (d) The insurance company may issue the insured a nonparticipating policy as a substitute for the participating policy Sec. 9. - SUBSCRIPTION RIGHTS. (a) Except for an alternative plan under section 14 each conversion plan must specify the subscription rights of eligible members. (b) The plan must include a provision that: 1)each eligible member is to receive without payment by the member, nontransferable subscription rights to purchase a portion of the capital stock of the converted company, and 2)in the aggregate all eligible members have the right over another party to purchase 100 percent of the capital stock of the converted company after certain provisions. (c)As an alternative to subscription rights in the converted company the conversion plan may provide that each eligible member is to receive nontransferable subscription rights to purchase capital stock. (d) The conversion plan must provide that the subscription rights are allocated in whole shares among eligible members in a fair and equitable manner. (e) The conversion plan must provide a fair and equitable means for allocating shares of capital stock in the event of oversubscription to shareholders exercising their rights. Sec. 10. SALE OF CAPITAL STOCK (a) The conversion plan must provide that any shares not distributed or sold to holders of surplus notes, subscribed to by tax qualified employee, subscribed to by directors or officers or eligible members shall be sold in private placement, public offering or alternative method approved by the commissioner. (b) The conversion plan must set the total price of the capital stock in an amount equal to the estimated pro forma market value of the converted company. (c) The conversion plan shall set the purchase price per share of capital stock at a reasonable price. The price need not be the same for each class of purchaser, so long as the stock is available at the lowest possible purchase price under the plan. (d) The conversion plan must provide that person or group or persons acting in concert may not acquire in the public or private offering more than 10 percent or the capital stock of the converted company unless there is approval from the commissioner. This does not include a company that acquires 100 percent of the capital stock as part of the conversion plan upon approval of the commissioner. (e) Except as provided by this article, the conversion must provide that a director or officer of the company, or person acting in concert with a director or officer may not acquire capital stock without permission of the commissioner before the third anniversary of the conversion. Sec. 11. - LIMITATIONS ON RESALE. The conversion plan must provide that an officer or director may not sell stock prior to the first anniversary of the conversion. The conversion plan may provide for purchase or redemption in the event that a director or officer is no longer associated with the company during such period. Sec. 12. - HOLDER OF SURPLUS NOTE. The conversion plan must provide that the rights of a holder of a surplus note to participate in the conversion must be governed by the terms of the surplus note. Sec. 13. - OPTIONAL PROVISIONS. (a) The conversion plan may provide that directors and officers of the mutual insurance company may receive nontransferable subscription rights to purchase the capital stock of the converted company or the stock of another corporation participating in the plan. (b) The aggregate number of shares that may be purchased by directors and officers may not exceed 35 percent of the total number of shares to be issued if the total assets are less than $50 million or 25 percent of the total number shares to be issued if total amount of assets are more than $500 million. For companies with total assets between $50 and $500 million, the total amount of assets shall be interpolated. (c) The conversion plan may allocate to a tax-qualified employee benefit plan nontransferable subscription rights to purchase not more than 10 percent of the capital stock of the converted company. (d) The conversion plan may provide for the creation of a liquidation account for the benefit of members in the event of voluntary liquidation in an amount equal to the surplus of the mutual insurance company exclusive of the principal amount of any surplus note on the last day of the quarter immediately preceding the date of adoption of the conversion plan. Sec. 14. - ALTERNATIVE CONVERSION PLAN. (a) The board of directors may adopt a plan that does not rely on issuing nontransferable subscription rights to members to purchase stock of the converted company if the alternative plan complies with this article, is fair and equitable, and permits the converted stock company to satisfy the current requirements applicable to a domestic stock company for a certificate of authority. (b) An alternative plan may include the merger of a domestic mutual insurance company into a domestic of foreign stock company, provide for issuing stock or other consideration instead of subscription rights, provide for the formation of a mutual holding company pursuant to section 24, or set forth another plan containing any other provisions approved by the commissioner. (c) The commissioner may retain at the mutual insurance company's expense a qualified expert not otherwise part of the commissioner's staff to assist in reviewing alternative plans. Sec. 15. - EFFECTIVE DATE OF CONVERSION. (a) The commissioner and eligible members must approve a conversion plan for it to become effective. (b)A conversion takes effect when the amended or restated article of incorporation are filed with the commissioner. Sec. 16. - RIGHTS OF MEMBERS WHOSE POLICIES ARE ISSUED AFTER ADOPTION OF CONVERSION PLAN AND BEFORE EFFECTIVE DATE. (a) The mutual insurance company will send a written notice of the conversion to those to whom the policy is issued after a conversion plan is adopted but before it become effective. (b) Except as provided by subsection (d) of this section a member of an accident and health insurance company is entitled to rescind the member's policy and receive a full refund of any amount paid. (c) Except as provided by subsection (d) of this section, each member who is insured under a property or casualty insurance policy is entitled to receive the notice described under subsection (a), and be advised of their right to cancel the policy, and receive a pro rata refund of premiums. (d) A member who has made or filed claims is not entitled to receive a refund under subsection (b) and (c). A person who exercises their rights under section (b) or (c) is not entitled make or file a claim. Sec. 17. - CORPORATE EXISTENCE. (a) On the effective date the conversion, the corporate existence of the mutual company continues in the converted stock company, all assets of the mutual insurance company are vested in the converted stock company. and the converted company assumes all obligations and liabilities of the mutual insurance company. (b) Unless otherwise specified in the conversion plan the directors shall continue in their role until new directors and officers are selected. SEC. 18. - CONFLICT OF INTEREST. (a) A director, officer, agent, employee of the mutual insurance company may not receive compensation other than the usual salary in assisting the conversion. This does not prevent the repayment of reasonable fees and compensation for services performed by that person. (b) All costs and expenses connected with the conversion shall be reimbursed. by the mutual insurance company or the converted company. Sec. 19. - EFFECT OF FAILURE TO GIVE NOTICE. If the mutual insurance company complies in good faith with the notice requirement, failure to provide notice will not impair the conversion. Sec. 20 - LIMITATION ON ACTIONS. An action challenging the validity of the conversion or acts of the conversion must be commenced within 30 days after the effective date of the conversion plan. Sec. 21 - INSOLVENT MUTUAL INSURANCE COMPANY. If a mutual insurance company is insolvent or in hazardous financial condition, then the board of directors may request a waiving of the notice requirement from the commissioner. The petition must state the method of issuance of the converted company's stock, that the conversion is to be accomplished without payment of consideration to past, present, or future policyholders if the commissioner finds that the value of the mutual insurance company is insufficient for such consideration. Sec. 22. - LAWS APPLICABLE TO CONVERTED STOCK COMPANY. (a) A company will not be permitted to convert under this article if as a result of conversion any person or affiliate gains control of the company unless that person complies with section 5, Article 21.49-1 of this code. (b) Except as otherwise provided a stock company converted under this article has all of the rights and privileges and is subject to all regulations imposed on a stock company formed under this code, and any other regulations used by state to control insurance companies. Sec. 23 - AMENDMENT OF POLICIES. A mutual insurance company may amend the right of any outstanding insurance policy to extinguish the right of the holder to share in the surplus with the approval of the commissioner and notification to policyholder. Such an amendment is void if the conversion is not enacted. Sec. 24. - MUTUAL HOLDING COMPANY. (a) (1)A mutual insurance company may reorganize by forming an insurance holding company based on a mutual plan and continuing the corporate existence of the reorganizing insurance company with approval of the commissioner. The commissioner shall approve of the plan, and may require modifications. The commissioner may use an expert as provided by subsection (3) of this article. (2)All of the initial shares of the capital stock shall be issued to the mutual holding company. Membership interests in the reorganized company shall become interest in the holding company. The mutual holding company shall hold a majority of shares of the capital stock of the reorganized company or of an intermediate holding company established to hold the voting shares of the reorganized company. (b) A foreign mutual insurance company may reorganize upon approval of the commissioner and in compliance with any law or regulation by transferring its interest into a mutual holding company formed under a procedure outlined in subsection (a). (c) A mutual holding company shall be organized pursuant to Chapter 15, Insurance Code, and incorporated pursuant to Art. 15.02, Insurance Code. The articles of incorporation shall be subject to approval of the commissioner. (d) A mutual holding company is an insurer subject to Chapter 15, Insurance Code, and shall be a party to any administrative proceeding under this code. In any proceeding the assets involving the reorganized insurance company are deemed to be assets of the estate of the reorganized company. A mutual holding company shall not dissolve or liquidate without approval of the commissioner. (e) A membership interest in a mutual company shall not constitute a security as defined in section 4 of the Securities Act of Texas. (f) The majority of voting shares required to be held by a mutual holding company shall to be conveyed or transferred, etc., by the mutual or intermediate holding company. Any transfer of voting shares is in violation and shall be void. in inverse chronological order. (g) Defines "Majority of voting shares of the capital stock of the reorganized insurance company." The ownership of a majority of the shares of capital stock which are required by this section to be owned by a parent mutual holding company includes indirect ownership through one or more intermediate holding companies. (h) A mutual holding company may convert to a stock holding company pursuant to the provisions of this article as if the such mutual holding company were a mutual insurance company. SECTION 2. - Effective Date, September 1, 1997 SECTION 3. - Emergency Clause COMPARISON OF ORIGINAL TO SUBSTITUTE SECTION 1. Sec. 3. Rewords Sec. 3(a)(6) regarding acquisition control. Adds language in Sec. 3(b) limiting the time the commissioner may extend approval time to 30 days. Adds additional language saying the commissioner may not extend consideration beyond this period unless he finds it necessary to retain a qualified expert for assistance. Adds new Sec. 3(c)(3). Adds language to Sec. 3(e) for posting in "Texas Register" as proper notification process. Sec. 4. Rewords Sec. 4. removing "approval" and adding "becomes effective" Sec. 5 (a) Sets time limit of within 10 business days. (c) Sets time of within 60 days of commissioners approval. Sec. 6. (a) Adds language for adoption of plan "at a duly convened meeting to consider plan of conversion." (c) Removes term "bylaws" from issues of consideration. Sec. 8. (b)(2) Adds exception of subsection (c) of this section. Sec. 9. (a) Adds exception under alternative plan under sec. 14. (b)(2)(B) Changes section number reference to 13(c). (b)(2)(C) Adds language reflecting capital stock acquired by the mutual insurance company's directors and officers. (d) Adds language requiring conversion plan to be fair and equitable according to board of directors. Sec. 10. (a) Amends language saying that shares of capital stock not sold or distributed will be sold in a private placement, public offering, or other alternative subject to approval by the commissioner. (b) Adds language giving consideration deemed necessary by Board of Directors to be raised. (c) Amends language about the purchase price per share need not be the same for each class as long as stock can be purchased at lowest available price under the plan. (d) Changes amount of stock a person or group may acquire from 5 to 10%. (e) Adds exception (e)(2) Renumbers reference to section 13(c). Sec. 11. Amends language for limitation on resale accounting for possibility that director or officer is no longer associated with the company. Sec. 13. Deletes old section 13, and renumbers other sections accordingly. (a) Removes language about allocation of subscription rights. Sec. 14 (a)(1) renumbered from other subdivision. (a)(3) New subdivision added. Sec. 18 Removes old Sec. (b) about nonqualified stock benefit conversion plans. Sec. 22 Removes definition of control. Adds new section 24 relating to "Mutual Holding Company." Sec. 24. - MUTUAL HOLDING COMPANY. (a) (1)A mutual insurance company may reorganize by forming an insurance holding company based on a mutual plan and continuing the corporate existence of the reorganizing insurance company with approval of the commissioner. The commissioner shall approve of the plan, and may require modifications. The commissioner may use an expert as provided by subsection (3) of this article. (2)All of the initial shares of the capital stock shall be issued to the mutual holding company. Membership interests in the reorganized company shall become interest in the holding company. The mutual holding company shall hold a majority of shares of the capital stock of the reorganized company or of an intermediate holding company established to hold the voting shares of the reorganized company. (b) A foreign mutual insurance company may reorganize upon approval of the commissioner and in compliance with any law or regulation by transferring its interest into a mutual holding company formed under a procedure outlined in subsection (a). (c) A mutual holding company shall be organized pursuant to Chapter 15, Insurance Code, and incorporated pursuant to Art. 15.02, Insurance Code. The articles of incorporation shall be subject to approval of the commissioner. (d) A mutual holding company is an insurer subject to Chapter 15, Insurance Code, and shall be a party to any administrative proceeding under this code. In any proceeding the assets involving the reorganized insurance company are deemed to be assets of the estate of the reorganized company. A mutual holding company shall not dissolve or liquidate without approval of the commissioner. (e) A membership interest in a mutual company shall not constitute a security as defined in section 4 of the securities act of Texas. (f) The majority of voting shares required to be held by a mutual holding company shall to be conveyed or transferred, etc., by the mutual or intermediate holding company. Any transfer of voting shares is in violation and shall be void in inverse chronological order. (g) Defines "Majority of voting shares of the capital stock of the reorganized insurance company." The ownership of a majority of the shares of capital stock which are required by this section to be owned by a parent mutual holding company includes indirect ownership through one or more intermediate holding companies. (h) A mutual holding company may convert to a stock holding company pursuant to the provisions of this article as if the such mutual holding company were a mutual insurance company.