Mutual Insurance Holding Company Treated as Insurance Company

SUMMARY: The FDIC is issuing a final rule ("Final Rule") that treats a mutual insurance holding company as an insurance company for purposes of Section 203(e) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"). The Final Rule clarifies that the liquidation and rehabilitation of a covered financial company that is a mutual insurance holding company will be conducted in the same manner as an insurance company. The Final Rule harmonizes the treatment of mutual insurance holding companies under Section 203(e) of the Dodd-Frank Act with the treatment of such companies under state insurance company insolvency laws.

DATES: The effective date of the Final Rule is May 30, 2012.

FOR FURTHER INFORMATION CONTACT: R. Penfield Starke, Assistant General Counsel, Legal Division, (703) 562-2422; Mark A. Thompson, Counsel (703) 562-2529; Elizabeth Falloon, Counsel (703) 562-6148; Timothy F. Danello, Counsel (703) 562-6338, Legal Division; or Hashim Hamandi, Section Chief Policy Section, Office of Complex Financial Institutions, (202) 898-6884.

SUPPLEMENTARY INFORMATION:

I. Background

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 Final Rule is promulgated pursuant to Section 209 /1/ of the Dodd-Frank Act, which authorizes the FDIC, in consultation with the Financial Stability Oversight Council, 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.

FOOTNOTE 1 12 U.S.C. 5389. END FOOTNOTE

On December 13, 2011, the FDIC published a Notice of Proposed Rulemaking ("NPR") in the Federal Register /2/ setting forth the conditions under which a mutual insurance holding company would be resolved as an insurance company under Section 203(e) of the Dodd-Frank Act. The comment period for the NPR closed on February 13, 2012, and the FDIC received four comment letters. Additionally, the FDIC held a conference call with representatives of the National Association of Insurance Commissioners on January 17, 2012 and received their comments on the NPR.

FOOTNOTE 2 76 FR 77442 (December 13, 2011). END FOOTNOTE

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 Final Rule.

History of Mutual Insurance Holding Company

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. /3/

FOOTNOTE 3 The Philadelphia Contributionship, History, http://www.contributionship.com/history/index.html. END FOOTNOTE

Mutual insurance companies have no equity interests. Membership rights are held by their policyholders. 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. /4/ 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, in most instances, the mutual insurance holding company initially owns 100% of the intermediate insurance stock holding company, and the intermediate insurance stock holding company initially 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.

FOOTNOTE 4 Iowa Code Ann. (West) SEC 521A.14. END FOOTNOTE

Consistent with the mutual insurance company, a mutual insurance holding company also has no equity interests. Membership rights are held by the policyholders of the converted mutual insurance company who have rights similar to those they had as policyholders of the mutual insurance company before conversion. Policyholders of the converted mutual insurance company are entitled to vote for members of the mutual insurance holding company's board of directors, and may receive special dividends in the form of capital distributions or reductions of policy premiums.

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. /5/

FOOTNOTE 5 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. SEC 44-6125(6)(g). END FOOTNOTE

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." /6/

FOOTNOTE 6 12 U.S.C. 5383(e)(1). END FOOTNOTE

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." /7/ 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 selling policies of insurance. 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.

FOOTNOTE 7 12 U.S.C. 5381(a)(13). END FOOTNOTE

The treatment of a mutual insurance holding company, under certain circumstances, as an insurance company for purposes of Section 203(e) is consistent with the legislative intent of the Dodd-Frank Act. /8/ This treatment is appropriate given the legal structure that forms a mutual insurance holding company from a converted mutual insurance company and 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 holders of its membership interests. From a regulatory policy perspective, 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 also support this treatment.

FOOTNOTE 8 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). END FOOTNOTE

II. Notice of Proposed Rulemaking: Summary of Comments

On December 13, 2011, the FDIC invited public comment on a Notice of Proposed Rulemaking: Mutual Insurance Holding Company Treated as Insurance Company (the "Proposed Rule"). /9/ The comment period ended on February 13, 2012. The FDIC received four comment letters from several industry and trade organizations representing the insurance industry and one individual. In addition, the FDIC met with representatives of the National Association of Insurance Commissioners to discuss the Proposed Rule.

FOOTNOTE 9 76 FR 77442 (December 13, 2011). END FOOTNOTE

--This is a summary of a Federal Register article originally published on the page number listed below--

Final rule.

CFR Part: "12 CFR Part 380"

RIN Number: "RIN 3064-AD89"

Citation: "77 FR 25349"

Federal Register Page Number: "25349"

"Rules and Regulations"