LIFE INSURANCE COMPANY FORMATION & RESTRUCTURING

Corporate Structure of Life Insurance Company

Because of the public’s need for insurance companies to be permanent and stable, insurance laws in the US require that life insurers organize and operate as corporations. A corporation is a legal entity, separate from its owners, that is created by the authority of a government and that continues beyond the death of any or all of its owners. Corporations have two important characteristics:

The characteristic of limited liability-The owners of a corporation are not personally liable for the debts of the corporation. If a corporation goes bankrupt, the corporation’s debts must be paid with the assets of the corporation only.

The characteristic of continued existence beyond the death of any or all of the corporation’s owners

Requirements for Incorporation

Must submit an application to the insurance or business regulatory body that governs Insurer Corporation in a particular jurisdiction’s an application for incorporation typically identifies the proposed corporation’s name, the location of its head quarters, its original directors, the type of business it will conduct, and its ownership structure. Regulators take into account the proposed corporation’s financial soundness, the feasibility of its future plans, its business record, and the competence and experience of the individuals who will operate the company.

Incorporation in the US

The usual procedure requires the organizers to file proposed articles of incorporation with the appropriate state official. The term articles of incorporation refers to a document that describes the essential features of the proposed company which includes

• Company’s name & the location
• Names of the company’s original directors
• Type of business in which the company will engage
• Amount of the initial investment being made
• Number of shares of company stock initially issued.

The certificate of incorporation also known as a corporate charter is a document that grants a corporation its legal existence and its right to operate as a corporation under the terms specified in the articles of incorporation.

The state in which the insurer incorporates and has its principal legal residence is known as the insurer’s domiciliary state.

An alien insurer is an insurer that is incorporated under the laws of a country other than the US.

Licensing of Life Insurance Companies in the US

An insurer must obtain a license, also known as a certificate of authority, from the insurance department in each state in which it plans to transact its business.

Membership Rights are ownership rights in the company, such as the right to vote in elections for the company’s board of directors on the basis of one vote for each policyowner, regardless of the amount of insurance or the number of insurance policies that the policy owner owns.

Policy rights are contractual rights such as the right to policy values, the right to assign the values to another party, the right to designate the beneficiary of the policy’s death benefit proceeds.

Fraternal benefit societies operate through a lodge system whereby only lodge members are permitted to own the fraternal benefit society’s insurance products. Some fraternal benefit societies offer insurance products to people who are not society members at the time of application, but the applicants automatically become members of the society once their policies are issued.

Changing the Corporate structure

Mergers (amalgamation) & Acquisitions an acquisition is a transaction wherein one company gains a controlling interest in another company, resulting in linkage between formerly independent corporations. It often involves the purchase of one company’s stock by another company. Sometimes the acquiring company holds the acquired company’s stock only as an investment.

Due Diligence

Before merging with or acquiring another company, a life insurer undertakes due diligence, which is a careful investigation into

• The details of a potential merger or acquisition
• The operations & management of the other company.

The term economics of scale refers to reduction in a company’s unit costs as the size of its operation increases.

Holding Company Systems

The holding company and the subsidiaries operate as distinct corporate entities under their own names. The holding company usually leaves operating decisions to the management of each subsidiary, but the management of the holding company is responsible for long-range planning for the entire holding company system and for allocating financial resources among the companies in the holding company system.

A holding company approach to the consolidation of two or more insurers has several advantages:

·         A holding company structure eliminates some of the potential corporate culture clashes.

·         A holding company arrangement can be used to control subsidiaries in widely differently industries.

·         A holding company may have better access to the capital markets.

·         Within limits established by laws, a subsidiary insurer can transfer funds to the holding company.

A downstream holding company is a holding company that is owned or controlled by the corporation that forms it. An upstream holding company is a holding company that controls the corporation that formed it and that can also own other subsidiaries.

Demutualization

For a demutualization to occur, policy owners must agree to surrender their membership rights in exchange for “valuable consideration”, such as portion of the company’s surplus or shares of stock in the new corporation. Policy owners maintain their policy rights through the new stock insurance corporation.

Advantages of Demutualization

• Improved access to capital.
• More flexible corporate structure.
• More aggressive management.
• More attractive employment incentives.

Disadvantages of Demutualization

• Have to balance the interests of policy owners & stockholders.
• Involves complex financial and legal reporting.
• Requires the distribution of a portion of a mutual company’s surplus.
• Can be lengthy & complex.

The Demutualization Process

Involves three steps:

·         The mutual insurer draws up a plan of demutualization that must be approved by the company’s board of directors.

·         The plan of demutualization is filed with the insurance regulatory body in the state where the insurer is domiciled.

·         The plan is presented to the mutual insurer’s policy owners for their approval.

Once demutualization is complete, mutual company policy owners who were compensated with stock become shareholders of the publicly traded stock company. The newly formed stock insurer may also offer new shares of stock to investors in the general population for the first time, a process known as making an initial public offering (IPO).

Mutual Holding Company Conversion

A mutual insurer seeking growth also has the option of converting to a mutual holding company. A mutual holding company conversion is a process by which a mutual insurance company reorganizes itself into 3 distinct entities:

1. A parent holding company organized as a mutual company
2. An intermediate holding company organized as a stock company
3. A subsidiary operating company organized as a stock insurer.

The newly formed mutual holding company is required to maintain at least a 51 percent interest in the intermediate stock holding company, and the intermediate stock holding company must control 100 percent of the newly formed stock insurance subsidiary.

Redomestication refers to the process by which a company changes its domiciliary state.