Source: https://www.federalregister.gov/documents/2011/12/13/2011-31885/mutual-insurance-holding-company-treated-as-insurance-company
Timestamp: 2016-10-22 16:02:43
Document Index: 237233063

Matched Legal Cases: ['§\u2009380', '§\u2009380', '§\u2009380', '§\u2009380', '§\u2009521', '§\u200944']

:: Mutual Insurance Holding Company Treated as Insurance Company
A Proposed Rule by the Federal Deposit Insurance Corporation on 12/13/2011
77442-77446
SUPPLEMENTARY INFORMATION:Start Printed Page 77443
https://www.federalregister.gov/d/2011-31885
Title II of the Dodd-Frank Act provides for the appointment of the FDIC as receiver of a nonviable financial company that poses significant risk to the financial stability of the United States (a “covered financial company”), outlines the process for the orderly liquidation of a covered financial company following the FDIC's appointment as receiver and provides for additional implementation of the orderly liquidation authority by rulemaking. The Proposed Rule is being promulgated pursuant to Section 209 [1] of the Dodd-Frank Act, which authorizes the FDIC, in consultation with the FSOC, to prescribe such rules and regulations as the FDIC considers necessary or appropriate to implement Title II. Section 209 of the Dodd-Frank Act further provides that, to the extent possible, the FDIC should seek to harmonize rules and regulations promulgated under Section 209 with the insolvency laws that would otherwise apply to a covered financial company.
On July 15, 2011, the FDIC published in the Federal Register a final rule regarding certain orderly liquidation authority provisions under Title II of the Dodd-Frank Act.[2] In response to the notice of proposed rulemaking [3] and interim final [4] rule that preceded the issuance of the final rule, commenters from the insurance industry urged the greatest possible deference to state regulators and to state laws, rules and regulations governing insurance companies and, in particular, state laws governing the liquidation and rehabilitation of insurance companies. Commenters urged the FDIC to treat mutual insurance holding companies as insurance companies for purposes of Title II of the Dodd-Frank Act.[5] In light of the comments received and pursuant to the authority granted to it by Section 209 of the Dodd-Frank Act, the FDIC is issuing the Proposed Rule, with a request for comments.
The mutual insurance industry traces its roots back to England, where, in 1696, the first mutual fire insurer was established. The first American mutual insurance company, the Philadelphia Contributionship for the Insurance of Houses from Loss by Fire, was founded in 1752.[6] Mutual insurance companies are owned by their policyholders, not by stockholders. Policyholders are entitled to vote for members of the company's board of directors and may receive special dividends in the form of capital distributions or reductions of policy premiums.
The mutual insurance holding company structure was first created in Iowa in 1995.[7] A mutual insurance holding company is created through the restructuring of a mutual insurance company into two entities, a mutual insurance holding company and a stock insurance company that is converted from the original mutual insurance company. In a variation of this restructuring, a third entity may be formed, an intermediate insurance stock holding company. In this three-entity structure, initially the mutual insurance holding company owns 100% of the intermediate insurance stock holding company, and the intermediate insurance stock holding company owns 100% of the stock of the converted mutual insurance company. The purpose of the restructuring is to preserve the benefits of a mutual form of organization while allowing the converted mutual insurance company access to capital markets either through sale of its stock or, in a three-entity structure, the sale of the stock of the intermediate insurance stock holding company.
A majority of the states have adopted statutes providing for the formation of mutual insurance holding companies. Those statutes generally (a) Provide for the regulation of a mutual insurance holding company at the holding company level by the insurance commissioner of the domiciliary state; (b) require that the mutual insurance holding company maintain voting control over the converted mutual insurance company; and (c) specifically subject a mutual insurance holding company to liquidation or rehabilitation under the state regime if the converted mutual insurance company is placed in liquidation or rehabilitation. In addition, either by statute, rule or regulation, in the liquidation of a converted mutual insurance company, the assets of the mutual insurance holding company generally are included in the estate of the converted mutual insurance company being liquidated.[8] Treatment of an Insurance Company Under Section 203(e) of the Dodd-Frank Act
In providing for the orderly liquidation of a covered financial company under Title II of the Dodd-Frank Act, Congress recognized that insurance companies historically had been liquidated and rehabilitated pursuant to a state insolvency framework. As a result, Congress provided that “if an insurance company is a covered financial company or a subsidiary or affiliate of a covered financial company, the liquidation or rehabilitation of such insurance company, and any subsidiary or affiliate of such company that is [an insurance company], shall be conducted as provided under applicable State law.” [9] The term “insurance company” is defined in Section 201(a)(13) of the Dodd-Frank Act to mean “any entity that is—(A) Engaged in the business of insurance; (B) subject to regulation by a State insurance regulator; and (C) covered by a State law that is designed to specifically deal with the rehabilitation, liquidation, or insolvency of an insurance company.” [10] The identical definition is found in Section 380.1 of Title 12 of the Code of Federal Regulations. Concerns have been raised with respect to the application of this definition to mutual insurance holding companies because, under applicable state laws, a mutual insurance holding company generally is prohibited from engaging in the business of insurance, that is, a mutual insurance holding company may not sell policies of Start Printed Page 77444insurance. Thus, a mutual insurance holding company arguably does not fit squarely within a literal reading of the statutory definition of insurance company under the Dodd-Frank Act.
Given the process by which a mutual insurance holding company is formed from a converted mutual insurance company, the continuing interest of the policyholders of the converted mutual insurance company in both the converted mutual insurance company, as its customers, and the mutual insurance holding company, as equity holders, the extensive regulation of the mutual insurance holding company by the insurance commissioner of its domiciliary state, and the inclusion of the mutual insurance holding company and its assets in the liquidation of the converted mutual insurance company, it is consistent with the intent of the Dodd-Frank Act to treat a mutual insurance holding company, under certain circumstances, as an insurance company for the purpose of Section 203(e) of the Dodd-Frank Act.[11] II. The Proposed Rule
The final proviso, which requires the mutual insurance holding company to limit its investments to the securities of the intermediate insurance stock holding company, the securities of the converted mutual insurance company and other assets and securities of the type authorized for holding and investment by an insurance company domiciled in its state of incorporation, is intended to ensure that the mutual insurance holding company is operating as a pure holding company and is not itself actively engaged in operating non-insurance businesses.[12] III. Request for Comments
8. Should the treatment of a mutual insurance holding company as an insurance company for the purpose of Section 203(e) of the Dodd-Frank Act be limited to companies that are materially, substantially or predominantly engaged in the business of Start Printed Page 77445insurance? If so, on what basis should that determination be made: an asset test, an income or revenue test, a test relating to risk exposures, or some other measure? IV. Regulatory Analysis and Procedure
The Regulatory Flexibility Act 5 U.S.C. 601 et seq. (RFA) requires each federal agency to prepare a final regulatory flexibility analysis in connection with the promulgation of a final rule, or certify that the final rule will not have a significant economic impact on a substantial number of small entities.[13] Pursuant to Section 605(b) of the Regulatory Flexibility Act, the FDIC certifies that the Proposed Rule will not have a significant economic impact on a substantial number of small entities.
Under regulations issued by the Small Business Administration (“SBA”), a “small entity” includes those firms within the “Finance and Insurance” sector with asset sizes that vary from $7 million or less in assets to $175 million or less in assets.[14] The Proposed Rule will clarify rules and procedures for the liquidation of a nonviable systemically important financial company, which will provide internal guidance to FDIC personnel performing the liquidation of such a company and will address any uncertainty in the financial system as to how the orderly liquidation of such a company would operate. As such, the Proposed Rule will not have a significant economic impact on small entities.
3. Revise § 380.1 to read as follows:
§ 380.1 Definitions.
Insurance Company. * * *
4. Revise § 380.11 to read as follows:
§ 380.11 Treatment of Mutual Insurance Holding Companies.
(d) the assets and investments of the company are limited to the securities of an intermediate insurance stock holding company, the securities of the converted mutual insurance company and other Start Printed Page 77446assets and securities of the type authorized for holding and investment by an insurance company domiciled in its state of incorporation.
12 U.S.C. 5389.
76 FR 41626 (July 15, 2011).
Notice of Proposed Rulemaking, 75 FR 64173 (October 19, 2010).
Interim Final Rule, 76 FR 4207 (January 25, 2011).
Letter dated January 18, 2011, to Robert E. Feldman, Executive Secretary, FDIC from National Association of Insurance Commissioners, http://www.fdic.gov/​regulations/​laws/​federal/​2010/​10Addcomment.PDF;​ Letter dated March 28, 2011, to Robert E. Feldman, Executive Secretary, FDIC from Mutual Insurance Holding Company Coalition, http://www.fdic.gov/​regulations/​laws/​federal/​2011/​11c04Orderly.PDF.
The Philadelphia Contributionship, History, http://www.contributionship.com/​history/​index.html.
Iowa Code Ann. (West) § 521A.14.
E.g., Iowa Code Ann. (West) 521A.14(4), 215 Ill. Comp. Stat. Ann. (West) 5/59.2(1)(f)(v), and Neb. Rev. Stat. § 44-6125(6)(g).
12 U.S.C. 5383(e)(1).
12 U.S.C. 5381(a)(13).
There is support in the legislative history of the Dodd-Frank Act for interpreting the term “insurance company” under Section 201(a)(13) to include a mutual insurance holding company. See statement of Rep. Barney Frank, 111 Cong. Rec. H5216 (daily ed. June 30, 2010) and statement of Sen. Christopher Dodd, 111 Cong. Rec. S5903 (daily ed. July 15, 2010).
The investments of the intermediate insurance stock holding company, however, are not restricted in this manner because, under the Proposed Rule, the intermediate insurance stock holding company is not treated as an insurance company for the purpose of Section 203(e) of the Dodd-Frank Act.