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NO. 86. AN ACT RELATING TO MUTUAL INSURANCE COMPANIES AND MUTUAL INSURANCE HOLDING COMPANIES.

(H.596)

It is hereby enacted by the General Assembly of the State of Vermont:

Sec. 1. 8 V.S.A. § 3423 is amended to read:

§ 3423. CONVERTING MUTUAL INSURER OR MUTUAL INSURANCE

HOLDING COMPANY

(a) A mutual insurer may become a stock insurer or a mutual insurance holding company may become a stock company or reorganize under such reasonable plan and procedure as may be approved by the commissioner after a hearing thereon of which notice was given to the *[insurer, its directors or trustees, officers, employees and its]* eligible members, all of whom shall have the right to appear at the hearing.

(b) The commissioner shall not approve any such plan or procedure unless:

(1) Its terms and conditions are fair and equitable;

(2) The plan shall have been duly adopted by action of not less than three-fourths of the members of the board of directors or trustees of the mutual insurer or mutual insurance holding company, as the case may be;

*[(2)]*(3) It is subject to approval by vote of not less than three-fourths of the *[insurer's current]* eligible members actually voting thereon in person, by proxy, or by mail at a meeting of members called for the purpose, for which at least 30 days’ notice has been provided to eligible members, pursuant to such reasonable notice and procedure as may be approved by the commissioner; *[if a life insurer, right to vote may be limited to members who hold policies which have been in force not less than one year;]* *[(3) The equity of each member in the insurer is determinable under a fair and reasonable formula approved by the commissioner, which such equity shall be based upon the insurer's entire surplus plus a reasonable present equity in its reserves and nonadmitted assets;]*

(4) *[The plan gives to each member of the insurer as specified in subdivision (5) of this section, a preemptive right to acquire his proportionate part of all the proposed capital stock of the insurer within a designated reasonable period, as such part is determinable under the plan of conversion, and to apply upon the purchase thereof the amount of his equity in the insurer as determined under subdivision (3) of this section]* The plan provides the method by which the aggregate value of eligible members’ interests will be determined. The method specified must be acceptable to the commissioner and shall be based on the market value of the converted company, unless another method for determining this value is approved by the commissioner;

(5) *[The members entitled to participate in the purchase of stock or distribution of assets shall include not less than all current policyholders of the insurer and each existing person who had been a policyholder of the insurer within three years prior to the date such plan was submitted to the commissioner]* The plan provides for each eligible member to receive a fixed component of consideration or a variable component of consideration, or both, or any other component of consideration acceptable to the commissioner. Any component shall reflect, based upon fair and equitable formulas, methods and assumptions, factors such as estimated proportionate contributions of classes, or groupings of policies and contracts to the aggregate component of consideration being distributed to eligible members, or other factors the commissioner may approve;

(6) *[Shares are to be offered to members at a price not greater than to be thereafter offered under the plan to others]* The plan specifies the consideration to the eligible members entitled thereto, which consideration may consist of cash, securities of the reorganized insurer or securities of another institution or institutions, subscription rights to purchase securities of the reorganized insurer or securities of another institution or institutions, a certificate of contribution, surplus notes, additional insurance or annuity benefits, policy credits, increased dividends or other consideration, or any combination of such forms of consideration as the commissioner may approve. The form or forms of consideration to be distributed to any class or category of member need not be the same as the consideration to be distributed to any other class or category of member. The choice of the form or forms of consideration to be distributed may take into account such factors as the class or category of policy with respect to what consideration is being distributed, the country of residence or tax status of eligible members, the reasonableness of the cost of providing a particular form of consideration in relation to its value, or other appropriate factors. If the plan provides for the sale of securities to members, the securities shall be offered to members at a price not greater than that to be offered under the plan to others;

(7) *[The plan provides for payment to each member not electing to apply his equity in the insurer for or upon the purchase price of stock to which preemptively entitled, of cash in an amount found to be reasonable by the commissioner but not less than one hundred percent of the amount of his equity not so used for the purchase of stock, and which cash payment together with stock so purchased, if any, shall constitute full payment and discharge of the member's equity or property interest as an owner of such mutual insurer.]* If the plan relates to the conversion of a mutual life insurer, the plan shall provide for the reasonable expectations of policyholders through the establishment of a closed block or other method acceptable to the commissioner. Any provision for dividend expectations may be limited to participating individual life insurance policies and participating individual annuity contracts in force or deemed to be in force by the plan of conversion on the effective date of the plan for which the insurer has an experience-based dividend scale due, paid or accrued by action of the board of directors of the mutual insurer in the year in which the plan is adopted; provided, however, that other categories of policies and benefits may be included or excluded, subject to approval of the commissioner;

(8) *[The]* If the plan relates to the conversion of a mutual insurer, the plan, when completed, would provide for the converted insurer paid-in capital stock in an amount not less than the minimum paid-in capital stock required of a domestic stock insurer upon initial authorization to transact like kinds of insurance, together with *[expendable surplus funds in amount not less than one-half of such required capital stock; and]* an amount of surplus which is no less than the amount that the commissioner deems to be reasonably necessary for the insurer’s future solvency;

(9) If the plan relates to the conversion or reorganization of a mutual insurance holding company, the plan shall provide for:

(A) the conversion of the mutual insurance holding company to a stock company followed by a merger or consolidation of the converted stock company with another stock company, which may include a subsidiary of the mutual insurance holding company;

(B) a sale of an intermediate stock holding company or stock insurer with shares or other consideration being distributed to members of the mutual insurance holding company, followed by the liquidation or dissolution of the mutual insurance holding company;

(C) a liquidation or dissolution of the mutual insurance holding company; or

(D) any combination of the foregoing or other reorganization or transfer of assets and assumption of liabilities approved by the commissioner; and

*[(9)]*(10) The commissioner finds that the insurer's management has not, through reduction in volume of new business written, or cancellation or through any other means sought to reduce, limit, or affect the number or identity of the insurer's members to be entitled to participate in such plan, *[or]* in order to secure for the individuals comprising management any unfair financial advantage through such plan, or intentionally engaged in any other conduct designed to secure for the individuals comprising management any unfair financial advantage through such plan.

(c) Subsection (b) of this section shall not be deemed to prohibit the inclusion in the demutualization plan of provisions under which the individuals comprising the insurer's management or mutual insurance holding company’s management, as the case may be, and employee group may receive employee benefit and compensation arrangements, including arrangements through the use of stock of the reorganized insurer or stock of its parent corporation or other entity, which are to become effective simultaneously with the plan of reorganization or, subsequently, provided such provisions are approved by the commissioner. If the plan provides for the distribution or sale to members of capital stock of the converted company, nothing in subsection (b) of this section shall be deemed to prohibit the inclusion in the plan of provisions under which the converting company’s directors, officers, agents or employees shall be entitled to purchase for cash at the same price as offered to the insurer's members, shares of stock not taken by members *[on the preemptive offering to members,]* in accordance with such terms and reasonable classifications of such individuals as may be included in the plan and approved by the commissioner.

(d) No director, officer, agent or employee of the insurer, the mutual insurance holding company, or any other person, shall receive any fee, commission or other valuable consideration whatsoever, other than their usual regular salaries and compensation, for in any manner aiding, promoting, or assisting in such conversion except as set forth in the plan approved by the commissioner. This provision shall not be deemed to prohibit the payment of reasonable fees and compensation to attorneys at law, accountants, and actuaries for services performed in the independent practice of their professions, even though also directors of the insurer.

(e) Upon the effective date of the plan, the rights of members in the mutual insurer or mutual insurance holding company shall be extinguished. All policies of a mutual insurer in force on the effective date of the plan shall remain in force under the terms of those policies, except for any terms affected by the extinguishment of those membership rights.

(f) If a plan provides for the distribution of common stock, but does not provide for registration and public trading of the common stock of the converted insurer or the parent corporation or the converted mutual insurance holding company or other entity as of the effective date of the plan, the plan shall require the appropriate entity or entities to use good faith efforts to encourage and assist in the establishment of a market for such stock as soon as reasonably possible and, in any event, not later than two years after the effective date of the reorganization unless otherwise approved by the commissioner. Within two years after the effective date of the reorganization unless otherwise approved by the commissioner, the converted insurer or the parent corporation or the converted mutual insurance holding company or other entity shall make available to each eligible policyholder or member who received and retained shares of common stock with minimal aggregate value upon reorganization, a procedure to dispose of shares of stock at market value without brokerage commissions or similar fees under a plan approved by the commissioner.

(g) At the option of the mutual insurer or mutual insurance holding company, as the case may be, any common shares or other securities of the converted stock company or of any other institution, included in the members’ consideration, other than those acquired as a result of a member exercising any subscription rights, may be placed in a trust or other entity existing for the exclusive benefit of the members, and established solely for the purpose of effectuating the reorganization to which such common shares or other securities are issued by the issuer on the effective date of the reorganization, such consideration to be distributed to members during a process specified in the plan and approved by the commissioner.

(h) Except as otherwise specifically provided in the plan of conversion, prior to and for a period of five years following the effective date of such plan, no person other than the converted stock insurer or an institution controlling the converted stock insurer or a converted mutual insurance holding company or institutions controlling the converted mutual insurance holding company shall, directly or indirectly, offer to acquire or acquire in any manner the beneficial ownership of five percent or more of any class of a voting security of the new stock insurer or of an institution which owns a majority or all of the voting securities of the new stock insurer or converted mutual insurance holding company, without the prior approval of the commissioner, of an application for acquisition filed by such person with the commissioner. The commissioner shall not approve an application for acquisition unless the commissioner finds, after a public hearing, that the acquisition would not frustrate the plan of conversion as approved by the policyholders or members and the commissioner, would be consistent with the purposes of this statute, and would be on terms and conditions that are fair and equitable to the policyholders or members, as the case may be. No security which is acquired or is to be acquired in contravention of this section or of any rule, regulation or order of the commissioner may be voted at any shareholders meeting. If the new stock insurer or converted mutual insurance holding company or any institution which owns a majority or all of the voting securities of the new stock insurer or converted mutual insurance holding company or the commissioner believes that any voting securities have been or are about to be acquired in contravention of this section or of any rule, regulation or order of the commissioner, he or she may apply to any court of competent jurisdiction in the state of Vermont for an order to enjoin any offer or acquisition made or any voting of any security so acquired, or to void the vote of any such security in contravention of this section or any rule, regulation or order of the commissioner, and for such other equitable relief as may be appropriate.

(i) A failure by a mutual insurer or a mutual insurance company to provide a member or members with the notice required by this section shall not impair the validity of any action taken under this section, if such mutual insurer or mutual insurance holding company has complied substantially and in good faith with all notice requirements, as determined by the commissioner.

(j) Documents submitted to the commissioner by the mutual insurer or mutual insurance holding company in connection with obtaining approval of the plan of conversion shall be public documents, except that financial data, actuarial memoranda and any other information which the commissioner determines could result in harm to the mutual entity or the converted entity or to its members if disclosed, shall be considered confidential. This confidentiality will not extend to information provided by the mutual entity which the commissioner deems necessary to be provided to members to evaluate the plan of conversion.

(k) Any aggrieved party to a plan, within the meaning of section 77 of this title, may appeal an order of the commissioner, pursuant to the provisions of such section, within 30 days after the issuance of an order of the commissioner approving or disapproving such plan. Any review by the court shall be confined to the record before the commissioner.

(l) As used in this section:

(1) “Eligible member” means, in the case of a mutual insurer, a person who owns or, pursuant to the terms of the plan, is deemed to own a policy which was in force as of the record date or, in the case of a mutual insurance holding company, a person who was or, pursuant to the terms of the plan, is deemed to have been a member as of the record date. For this purpose, the record date is the date when the mutual company’s board of directors first adopts the plan of conversion, unless another date is specified in the plan of conversion and approved by the commissioner. In the case of a mutual life insurance company or a mutual insurance holding company, the membership of which is derived from the purchase of contracts from a life insurance company, eligibility may be limited to members holding contracts which have been in force not less than one year.

(2) “Fair and equitable” means that any action undertaken, pursuant to this section, with respect to a plan of conversion, provides for full and proper consideration of the aggregate membership interests and corresponding values of eligible members, in no manner discriminates improperly among eligible members, and appropriately protects the interests of eligible members before and subsequent to the conversion.

Sec. 2. 8 V.S.A. § 3441(b) is amended to read:

(b) All of the initial shares of the capital stock of the reorganized insurance company shall be issued to the mutual insurance holding company or to a stock insurance holding company which is wholly owned by the mutual insurance holding company. The membership interests of the policyholders of the reorganized insurance company shall become membership interests in the mutual insurance holding company. Policyholders of the reorganized insurance company shall be members of the mutual insurance holding company in accordance with the articles of *[association]* incorporation and bylaws of the mutual insurance holding company. The mutual insurance holding company shall at all times own, directly or indirectly, a majority of the voting shares of the capital stock of the subsidiary stock insurance company. For purposes of this subchapter, “stock insurance holding company” means a corporation at least a majority of the voting shares of which is owned, directly or through another stock insurance holding company, by a mutual insurance holding company and which holds, directly or indirectly, all the voting shares of the reorganized insurer.

Sec. 3. 8 V.S.A. § 3441(c) is amended to read:

(c) Reorganization of the domestic mutual insurance company shall be subject to approval of its members or policyholders in accordance with section 3427 of this title and dissenting members or policyholders may petition the commissioner in accordance with section 3429 of this title, except the request for a hearing must be filed within 30 days of the giving of notice to policyholders of their right to dissent after the regular or special meeting of the policyholders at which the reorganization was approved; provided however that no notice is required to be sent to policyholders who voted in favor of the reorganization.

Sec. 4. 8 V.S.A. § 3442 is amended to read:

§ 3442. MERGER OF MUTUAL INSURANCE COMPANY INTO AN

EXISTING MUTUAL INSURANCE HOLDING COMPANY;

MERGER AND ACQUISITION BY MUTUAL INSURANCE

HOLDING COMPANY OR SUBSIDIARY OF MUTUAL

INSURANCE HOLDING COMPANY

(a) Merger of mutual insurance company into mutual insurance holding company. A domestic or foreign mutual insurance company, upon the approval of the commissioner, may reorganize by merging its policyholders’ membership interests into a mutual insurance holding company formed pursuant to section 3441 of this title and continue the corporate existence of the reorganizing insurance company as a *[domestic]* stock insurance company subsidiary of the mutual insurance holding company. A merger pursuant to this section shall be governed by the terms, conditions and procedure set forth in section 3441 of this title.

(b) Merger and acquisition by mutual insurance holding company or subsidiary of mutual insurance holding company. Subject to applicable requirements of this chapter, a mutual insurance holding company may:

(1) Merge or consolidate with, or acquire the assets of, a mutual insurance holding company reorganized pursuant to this act or any similar entity organized pursuant to the laws of any other state;

(2) Either alone or together with one or more stock insurance holding companies as defined in section 3443(c) of this title, or other subsidiaries, directly or indirectly, acquire the stock of a stock insurance company or a mutual insurance company that reorganizes under this act or the law of its state of organization;

(3) Together with one or more of its stock insurance company subsidiaries, acquire the assets of a stock insurance company or a mutual insurance company; or

(4) Acquire a stock insurance company through the merger of such stock insurance subsidiary with a stock insurance company or stock insurance holding company.

(c) A merger or consolidation pursuant to subsection (b) of this section is subject to the standards and procedures prescribed in sections 3424 through 3434 of this title. Mutual insurance holding companies and stock insurance holding companies shall be considered insurers for purposes of application of such sections.

(d) No such merger or consolidation shall be effectuated unless in advance thereof, the plan and agreement therefor have been filed with and approved by the commissioner. Such approval shall be given unless the commissioner finds such plan or agreement:

(1) Is inequitable to the policyholders of any insurer involved in the merger or the members of any mutual insurance holding company involved in the merger; or

(2) Would substantially reduce the security of and service to be rendered to policyholders of an insurer involved in the merger or consolidation.

(e) A stock or asset acquisition pursuant to subsection (b) of this section shall be subject to the provisions of subsection (c) of section 3443 of this title.

(f) The provisions of subsection (b) of section 3441 of this title shall apply to any transaction under this section which involves the merger, consolidation or acquisition of a mutual insurance company or mutual insurance holding company.

Sec. 5. 8 V.S.A. § 3443 is amended to read:

§ 3443. REGULATED AS AN INSURANCE COMPANY

(a) A stock insurance company resulting from the reorganization of a domestic mutual insurance company shall be regulated as a stock insurance company under this title and shall have all the rights, privileges, immunities and powers of the former mutual insurance company and shall be subject to all the duties and liabilities of an insurer organized under this title.

(b) The commissioner shall retain jurisdiction over a mutual insurance holding company and any stock insurance holding company to assure that policyholder interests are protected. A mutual insurance holding company and any stock insurance holding company are deemed to be insurers subject to chapter 145 of this title. A mutual insurance holding company and any stock insurance holding company shall automatically be a party to any proceeding under chapter 145 of this title involving a stock insurance company reorganized under this subchapter. In any proceeding under chapter 145 of this title involving a reorganized stock insurance company, the assets of the mutual insurance holding company and any stock insurance holding company are deemed to be assets of the estate of the reorganized insurance company for purposes of satisfying the claims of the reorganized insurance company’s policyholders. A mutual insurance holding company shall not dissolve or liquidate without the approval of the commissioner or as ordered by the superior court pursuant to chapter 145 of this title. The commissioner shall have jurisdiction over a stock insurance holding company as if it were a mutual insurance holding company.

(c) Acquisitions and investments by mutual insurance holding companies, including those acquisitions pursuant to subsection (b) of section 3442 of this title, shall be subject to the procedures and standards prescribed by subchapter 13 of chapter 101 of this title. Mutual insurance holding companies and stock insurance holding companies shall be considered a domestic insurer for purposes of such acquisition.

Sec. 6. REPEAL

8 V.S.A. § 3924 (business confined within territorial limit) is repealed.

Sec. 7. 8 V.S.A. § 3931 is amended to read:

§ 3931. APPLICATION OF PROVISIONS

(a) All the provisions of this part, insofar as consistent with the provisions of this subchapter, shall apply to cooperative insurance corporations.

(b) Cooperative fire insurance corporations formed and operated under the provisions set forth in chapter 105, subchapter 2 of this title shall be considered to be mutual insurance companies for the purpose of engaging in any or all of the transactions authorized by chapter 101 of this title, including those provisions set forth in subchapters 3 and 3A of that chapter.

Sec. 8. 8 V.S.A. § 6006(g) is amended to read:

(g) Captive insurance companies formed as corporations under the provisions of this chapter shall have the privileges and be subject to the provisions of the general corporation law as well as the applicable provisions contained in this chapter. In the event of conflict between the provisions of said general corporation law and the provisions of this chapter, the latter shall control. The provisions of subchapter 3, chapter 101 of this title, pertaining to mergers, consolidations, conversions, mutualizations and redomestications, shall apply in determining the procedures to be followed by captive insurance companies in carrying out any of the transactions described therein, except that:

(1) the commissioner may, upon request of an insurer party to a merger authorized under subsection (a) of this section, waive the requirement of subdivision (6) of section 3424 of this title; and

(2) the commissioner may waive or modify the requirements for public notice and hearing in accordance with rules which the commissioner may adopt addressing categories of transactions. If a notice of public hearing is required, but no one requests a hearing, then the commissioner may cancel the hearing; and

(3) the provisions of subsections 3423(f) and (h) of this title shall not apply, and the commissioner may waive or modify the requirement of subdivision 3423(b)(4) of this title, with respect to market value of a converted company as necessary or desirable to reflect applicable restrictions on ownership of companies formed under this chapter.

Sec. 9. 8 V.S.A. § 7031(13) is amended to read:

As used in this chapter:

* * *

(13) "Insurer" means any person who has done, purports to do, is doing or is licensed to do an insurance business, and is or has been subject to the authority of, or to liquidation, rehabilitation, reorganization, supervision, or conservation by, any insurance commissioner. For purposes of this chapter, insurer shall also include:

(A) all insurers who are doing, or have done, an insurance business in this state, and against whom claims arising from that business may exist now or in the future;

(B) all insurers who purport to do an insurance business in this state;

(C) all insurers who have insureds resident in this state;

(D) all other persons organized or in the process of organizing with the intent to do an insurance business in this state;

(E) all nonprofit hospital and medical service plans, subject to the provisions of chapters 123 and 125 of this title;

(F) all fraternal benefit societies subject to the provisions of chapter 121 of this title;

(G) all title insurance companies;

(H) all captive insurance companies, risk retention groups and other similar entities regulated pursuant to this title;

(I) all mutual workers' compensation insurance associations subject to the provisions of chapter 117 of this title;

(J) all health maintenance organizations and other prepaid health care delivery plans regulated pursuant to this title; *[and]*

(K) municipal pools, continuing care retirement communities and other *[speciality]* specialty insurers subject to regulation by the department; and

(L) all mutual insurance holding companies and stock insurance holding companies of a reorganized stock insurance company as provided in subchapter 3A of chapter 101 of this title.

Sec. 10. EFFECTIVE DATE

This act shall take effect upon passage.

Approved: April 27, 2000