S4296

An Act concerning certain mutual holding companies and supplementing Title 17 of the Revised Statutes.

Be It Enacted by the Senate and General Assembly of the State of New Jersey:

1. The Legislature finds and declares that it is in the interest of the subscribers of a health service corporation that a health service corporation mutualizing under existing law also be permitted to reorganize into a mutual holding company system to promote investments in health services and diversified businesses for the benefit of its subscribers. The Legislature further finds and declares that other states have authorized nonprofit health insurance carriers to reorganize into a nonprofit mutual holding company system to the benefit of subscribers and the health care marketplace.

2. As used in this act:

“Assessment” means a limited duration assessment made upon a mutual holding company pursuant to section 12 of this act.

“Commissioner” means the Commissioner of Banking and Insurance.

“Control” has the meaning set forth in section 1 of P.L.1970, c.22 (C.17:27A-1).

“Effective time” means the date and time at which the reorganization into a mutual holding company is effective, as provided in subsection d. of section 4 of this act.

“Former health service corporation” or “subsidiary legacy stock insurer” means a stock insurer authorized pursuant to Title 17B of the New Jersey Statutes to transact health insurance as defined in N.J.S.17B:17-4 and that, pursuant to a plan of reorganization as provided in this act, is a subsidiary of the mutual holding company system that holds the business of the health service corporation mutualizing and reorganizing pursuant to this act that is related to policies directly written and issued by the health service corporation.

“Health service corporation” means an entity organized pursuant to P.L.1985, c.236 (C.17:48E-1 et seq.).

“Insurance company” means any entity, other than the former health service corporation, that is a risk-bearing entity authorized to write insurance and transact the business of insurance.

“Intermediate holding company” means an entity of which at least a majority of the voting shares of the capital stock are at all times owned directly or indirectly through other intermediate holding companies by a mutual holding company.

“Majority of the voting shares of the capital stock” means, with respect to any entity, shares of the capital stock of that entity which carry the right to cast a majority of the votes entitled to be cast by all of the outstanding shares of the capital stock of that entity for the election of directors.

“Member” means the holder of a membership interest in a mutual holding company, pursuant to the articles of incorporation or bylaws of that mutual holding company.

“Mutual holding company” means a non-insurance, nonprofit entity without permanent capital stock organized under the laws of this State in accordance with the provisions of this act for the purpose of holding, directly or indirectly, a controlling interest in a former health service corporation pursuant to a plan of reorganization as provided in this act. A mutual holding company is not an insurer and is not licensed to issue insurance policies, contracts or health benefit plans.

“Mutual holding company system” means the structure resulting from the simultaneous formation of a mutual holding company and subsidiary legacy stock insurer in connection with the mutualization of a health service corporation, with the business of the health service corporation related to the policies directly written and issued by the health service corporation being continued by the subsidiary legacy stock insurer (former health service corporation).

“Mutual insurer” means a domestic mutual insurer into which a health service corporation transitions in accordance with the provisions of P.L.1995, c.196 (C.17:48E-45 et seq.).

“Non-insurance subsidiary” means any subsidiary of a mutual holding company that is not an insurance company or the former health service corporation.

“Reorganization” means the simultaneous mutualization of a health service corporation to a domestic mutual insurer and transformation from a domestic mutual insurer to a mutual holding company with a subsidiary legacy stock insurer (former health service corporation) in accordance with the provisions of this act.

3. a. A health service corporation organized pursuant to P.L.1985, c.236 (C.17:48E-1 et seq.) may reorganize to create a mutual holding company system pursuant to a plan of reorganization at the same time it applies to transition to a mutual insurer pursuant to P.L.1995, c.196 (C.17:48E-45 et seq.). Thereafter, the reorganized entity including any of its non-insurance subsidiaries and insurance company subsidiaries shall not be qualified as a health service corporation or be subject to the laws, rules, or regulations pertaining to a health service corporation, except for the specific purposes of section 13 of this act.

b. The mutual holding company system shall consist of a mutual holding company and one or more controlled subsidiaries, including the former health service corporation, and shall be operated for the benefit of its members.

c. The mutual holding company and each of its non-insurance subsidiaries, other than the former health service corporation and any insurance company subsidiaries, shall not be:

(1) an insurer and therefore shall not be subject to any of the provisions of N.J.S.17B:18-1 et seq. applicable to stock or mutual insurers, including rules and regulations adopted thereunder, including with respect to governance, stock or other voting or equity interest, the writing of insurance, any investment limitations directly applicable to risk-bearing entities engaged in the writing of insurance such as those under N.J.S.17B:20-1 et seq., or any capital or surplus requirements;

(2) authorized to transact the business of insurance; or

(3) qualified as an insurer.

The writing of insurance shall be permitted only through the former health service corporation and other insurance company subsidiaries or investments of the mutual holding company. Nothing herein shall alter the oversight of the commissioner with respect to the mutual holding company and its non-insurance subsidiaries provided for under applicable laws and rules of this State relating to insurance holding company systems.

d. A mutual holding company shall be a nonprofit entity incorporated under, and shall conduct its business pursuant to, the provisions of Title 15A of the New Jersey Statutes, except that in situations in which the provisions of that title are inconsistent with the provisions of this act, the provisions of this act shall govern.

e. At the effective time, members shall receive membership interests of the mutual holding company, and thereafter 100 percent of the membership interests of the mutual holding company shall continue to be held by members, in each case, in the manner set forth in the articles of incorporation and bylaws of the mutual holding company.

f. All of the initial shares of the capital stock of the former health service corporation shall be issued either to the mutual holding company, or to one or more intermediate holding companies that are wholly owned by the mutual holding company. This restriction shall not preclude, subject to the approval of the commissioner pursuant to section 4 of P.L.1970, c.22 (C.17:27A-4), the transfer of existing, or subsequent issuance of additional, shares of stock by the former health service corporation, provided the mutual holding company at all times owns, directly or indirectly through one or more intermediate holding companies, a majority of the voting shares of the capital stock of the former health service corporation.

g. The subsidiaries of a mutual holding company system may be formed by any of the following means:

(1) the formation of one or more subsidiaries;

(2) amendment or restatement of the articles of incorporation and bylaws of one or more companies;

(3) transfer of assets and liabilities among two or more companies;

(4) issuance, acquisition or transfer of capital stock of one or more companies; or

(5) merger or consolidation of two or more companies.

4. a. A health service corporation may submit an application to the commissioner to form a mutual holding company system at the same time the corporation submits an application to transition to a mutual insurer pursuant to P.L.1995, c.196 (C.17:48E-45 et seq.). Prior to submission of the application, the board of directors of the health service corporation shall adopt a resolution to form a mutual holding company system and transition to a mutual insurer, at a meeting of the board by a two-thirds affirmative vote of the total number of directors of the health service corporation. A copy of the minutes of the meeting at which that resolution is adopted shall be filed with the commissioner. The resolution shall include a plan to form a mutual holding company system and transition to a mutual insurer, including proposed articles of incorporation and bylaws for the mutual holding company and proposed articles of incorporation, certificates of formation, restatements of, or amendments to, existing articles of incorporation or bylaws, and plans of merger or consolidation, with respect to each entity to be formed, converted or otherwise subject or party to the transition transactions under the plan of mutualization and reorganization.

In addition to including information required pursuant to section 2 of P.L.1995, c.196 (C.17:48E-46) for the plan of mutualization, with respect to the formation of a mutual holding company system for purposes of this provision, the plan shall include:

(1) A description of the structure of the mutual holding company system consistent with the requirements set forth in this act;

(2) A description of the qualifications for members’ membership in, and the rights of members of, the mutual holding company consistent with the requirements set forth in this act;

(3) A description of the transactions, and parties to those transactions, that will affect the mutualization and reorganization, including, but not limited to, transfer and assumption of policies, contracts, assets and liabilities, formation of entities, the amendment or restatement of certificates of incorporation or bylaws. The plan of reorganization may provide for the transfer of assets of a health service corporation to the mutual holding company or one or more subsidiaries of the mutual holding company in connection with the formation of the mutual holding company system;

(4) The identity of those persons who shall serve as directors and officers of the mutual holding company, its intermediate holding companies, if any, and its subsidiaries, including the former health service corporation, as of the effective time of the mutualization and reorganization. The plan shall specify the members of the board of directors of the health service corporation who shall serve as initial directors of the mutual holding company, as provided in section 15 of this act;

(5) Information sufficient to demonstrate that the financial condition of the former health service corporation and the insurance company subsidiaries of the former health service corporation will meet solvency requirements under applicable laws and rules of this State relating to insurance companies after giving effect to the mutualization and reorganization;

(6) A representation that, following the mutualization and reorganization, the material terms and conditions of insurance coverage of:

(a) policyholders of policies directly written and issued by the health service corporation shall remain in full force and effect under policies transferred to and assumed by the subsidiary legacy stock insurer (former health service corporation); and

(b) all other policyholders shall remain in full force and effect under policies transferred to and assumed by insurance company subsidiaries of the mutual holding company;

(7) A representation that, following the mutualization and reorganization, the material terms and conditions of subordinated surplus notes and other contractual obligations, other than those arising under policies described in paragraph (6) of this subsection, of the health service corporation and its subsidiaries shall, subject to the rights of the health service corporation and its subsidiaries under applicable law, and to the extent those obligations are not otherwise satisfied or terminated in accordance with their terms, remain in effect upon the transfer of those obligations to, and assumption of those obligations by, the subsidiary legacy stock insurer or one or more other subsidiaries of the mutual holding company; and

(8) A representation that, following the mutualization and reorganization, the mutual holding company shall comply with the employment requirements as provided in section 16 of this act.

b. Upon the affirmative vote of the board of directors complying with subsection a. of this section, the plan to form a mutual holding company system simultaneous with the transition to a mutual insurer under this act shall be filed with the commissioner for approval. The commissioner shall review the plan to mutualize and reorganize in accordance with the requirements of subsection a. of section 3 of P.L.1995, c.196 (C.17:48E-47). The public hearing conducted pursuant to subsection a. of section 3 of P.L.1995, c.196 (C.17:48E-47) shall also address the plan of reorganization to the mutual holding company system required by this act. Consistent with subsection a. of section 3 of P.L.1995, c.196 (C.17:48E-47), the commissioner shall approve a plan of mutualization and reorganization unless the commissioner finds the plan:

(1) is contrary to law;

(2) would be detrimental to the safety or soundness of the proposed subsidiary legacy stock insurer and insurance company subsidiaries of the proposed mutual holding company; or

(3) prejudices the interests of the policyholders of the health service corporation or treats them inequitably.

At the expiration of 30 days after the public hearing, the commissioner shall approve or disapprove the plan of mutualization and reorganization and shall set forth the decision in writing and shall state the reasons therefor. The plan of mutualization and reorganization shall be deemed approved 30 days after the public hearing unless it has previously been approved or disapproved by the commissioner. The commissioner shall inform the health service corporation of the specific reasons for the disapproval of any plan of mutualization and reorganization and provide a cure period of no shorter than 90 days to cure any deficiencies. Any disapproval shall be subject to judicial review as a final decision of a State administrative agency.

c. A plan of mutualization and reorganization may be amended, terminated, or approved consistent with this act. A plan of mutualization and reorganization adopted by the board of directors of the applicant may be:

(1) Amended by the board of directors of the applicant in response to the comments or recommendations of the commissioner at any time; or

(2) Terminated by the board of directors of the applicant at any time. An applicant that has terminated a plan to, simultaneously with the transition to a mutual insurer, form a mutual holding company system shall be deemed to have also terminated the application to transition to a mutual insurer.

d. An approved plan of mutualization and reorganization shall be effective at the effective time specified in the plan of reorganization, or such other time subsequently requested by the applicant and agreed to by the commissioner.

5. A mutual holding company system shall be considered an insurance holding company system and subject to P.L.1970, c.22 (C.17:27A-1 et seq.) but shall not be required to seek separate approval for an acquisition of controlling stock, ownership interest, assets or control, or for a merger or consolidation, share exchange, organization, or reorganization of insurance companies, or other transactions with respect to any action taken in compliance with the provisions of this act. As an insurance holding company system, the commissioner shall have the power to order production of any records, books, or other information and papers in the possession of a mutual holding company system as are reasonably necessary to ascertain the financial condition of the mutual holding company system or to determine compliance with this act.

6. a. Subject to the approval of the commissioner and compliance with section 2 of P.L.1970, c.22 (C.17:27A-2), a domestic mutual holding company may merge or consolidate with one or more mutual holding companies or mutual insurers. Any surviving or new company resulting from a merger or consolidation of a mutual holding company with one or more mutual holding companies or mutual insurers, in each case, shall at all times own, directly or indirectly through one or more intermediate holding companies or subsidiaries, a majority of the voting shares of the capital stock of the former health service corporation. For purposes of this subsection, “mutual holding company” or “mutual insurer” means a mutual holding company or mutual insurer organized under the laws of any state.

b. A mutual holding company or a non-insurance subsidiary may, alone or together, make any lawful investments including directly or indirectly acquiring the stock or other ownership interests of any entities.

c. Insurance company subsidiaries and the former health service corporation may make investments, including investments in non-insurance entities subject to investment and asset limitations under applicable laws and rules of this State relating to insurance companies.

7. Neither the adoption nor the implementation of a plan of mutualization and reorganization shall be deemed to give rise to any obligation by or on behalf of any entity in the mutual holding company system or any predecessor entity to make any distribution or payment to any member or policyholder, or to any other person, fund, or entity of any nature whatsoever, in connection with the ownership, control, benefits, policies, purpose, or nature of any entity in the mutual holding company system, any predecessor entity or otherwise.

8. a. Membership in a mutual holding company shall be determined in accordance with the mutual holding company’s articles of incorporation and bylaws and may be based upon:

(1) the amount of health insurance policies in force with the subsidiary legacy stock insurer;

(2) the amount of the health insurance premiums paid to the subsidiary legacy stock insurer; or

(3) other reasonable factors.

A mutual holding company may also consider the amount of premiums paid to, or policies in force under, affiliated insurance companies operating under the same brand licensee program as the former health service corporation and permit entities holding administrative services agreements with the mutual holding company to be members of the mutual holding company. The mutual holding company may provide in its bylaws the basis for the number of votes those entities will have as members of the mutual holding company.

b. Members of a mutual holding company shall be entitled to vote for the election of directors of the mutual holding company in accordance with the mutual holding company’s bylaws. Directors of the mutual holding company shall be elected from nominees selected by the nominating and governance committee of the board of directors of the mutual holding company, or a comparably authorized committee, except for public directors serving in accordance with section 15 of this act.

c. No member of a mutual holding company shall transfer membership or any right arising therefrom.

d. Except as specified in subsection b. of this section, a membership interest in a mutual holding company shall not be deemed to give rise to any other rights, including any ownership interests in, or ownership rights with respect to, the assets of any entity in the mutual holding company system or any predecessor entity, and shall not be deemed to give rise to any entitlement to receive payment of any dividend or other distribution in connection with the ownership, control, benefits, policies, purpose or nature of any entity in the mutual holding company system or any predecessor entity.

e. A member of a mutual holding company is not personally liable for the acts, debts, liabilities or obligations of the mutual holding company solely because of the member’s membership status.

f. No assessments shall be imposed upon the members of a mutual holding company by the directors or members, or because of any liability, act, debt or obligation of the mutual holding company or of any company owned or controlled by the mutual holding company.

g. A membership interest in a mutual holding company shall not constitute a security under the laws of this state.

9. Upon any voluntary dissolution of a mutual holding company in accordance with N.J.S.15A:12-2, 15A:12-3, 15A:12-4, 15A:12-5, 15A:12-6, 15A:12-7, or section 19 of P.L.1992, c.65 (C.17B:32-49), the mutual holding company shall adopt a plan of dissolution in accordance with N.J.S.15A:12-8. The plan shall provide that any assets of the mutual holding company remaining after the discharge of all liabilities and obligations, if any, shall be distributed in accordance with N.J.S.15A:12-8.

10. A mutual holding company shall file with the commissioner, by May 1 of each year, an annual statement consisting of an income statement, balance sheet, and cash flow statement prepared in accordance with generally accepted accounting principles, as amended from time to time, and a confidential statement disclosing any intention to pledge, borrow against, alienate, hypothecate, or in any way encumber the assets of the mutual holding company. A mutual holding company shall also have an annual audit by an independent certified public accountant in a form approved by the commissioner and shall file the audit on or before June 1 of each year for the year ended December 31 immediately preceding.

11. All information, documents and copies of information and documents obtained by or disclosed to the commissioner, the Department of Banking and Insurance, or any other person in the course of preparing, filing or processing an application to reorganize pursuant to this act, including the annual statement required under section 10 of this act, other than information or documents distributed to policyholders in connection with the plan of reorganization or election of directors, shall be subject to the confidentiality requirements set forth in section 9 of P.L.2014, c.81 (C.17:27A-6).

12. a. On June 1 of the next calendar year following the calendar year of the effective time, the mutual holding company shall pay an initial assessment to the State Treasury in the amount of $200,000,000.

b. Following the initial assessment, and subject to subsections c. and d. of this section, the mutual holding company shall pay to the State Treasury by June 1 of each subsequent calendar year an annual assessment for a period of six years. The total assessment, including both the initial and annual assessments, shall not exceed $1,000,000,000. The annual assessments shall be based on the following schedule:

(1) For annual assessment 1, 2 percent of the mutual holding company’s consolidated annual revenue for the calendar year preceding this assessment, with this assessment not to exceed $200,000,000.

(2) For annual assessment 2, 2 percent of the mutual holding company’s consolidated annual revenue for the calendar year preceding this assessment, with this assessment not to exceed $200,000,000.

(3) For annual assessment 3, 1 percent of the mutual holding company’s consolidated annual revenue for the calendar year preceding this assessment, with this assessment not to exceed $100,000,000.

(4) For annual assessment 4, 1 percent of the mutual holding company’s consolidated annual revenue for the calendar year preceding this assessment, with this assessment not to exceed $100,000,000.

(5) For annual assessment 5, 1 percent of the mutual holding company’s consolidated annual revenue for the calendar year preceding this assessment, with this assessment not to exceed $100,000,000.

(6) For annual assessment 6, 1 percent of the mutual holding company’s consolidated annual revenue for the calendar year preceding this assessment, with this assessment not to exceed $100,000,000.

c. The mutual holding company shall not pay any portion of the annual assessment for a given calendar year if the mutual holding company’s system-wide health risk-based capital authorized control level would fall below 550 percent based on the standards for risk based capital for health organizations as adopted by the National Association of Insurance Commissioners following the payment as applied against the prior calendar year’s risk based capital, or in the opinion of any nationally recognized statistical rating organization, the group credit rating of the mutual holding company would not be considered investment grade.

d. (1) If the mutual holding company does not pay the annual assessment for a given calendar year pursuant to subsection c. of this section, the annual assessment that was not paid shall be deferred to the subsequent calendar year with all future annual assessments under subsection b. of this section also deferred by another calendar year so that no two annual assessments are due in the same calendar year. In the case of a deferred assessment, the percentage payment by the mutual holding company shall be for either the calendar year originally assessed, or the calendar year preceding the deferred payment, whichever is greater, provided that no payment shall exceed the limitations for the respective scheduled step.

(2) Notwithstanding the provisions of paragraph (1) to the contrary, the assessment years under subsection b. of this section shall not be extended beyond, and the payment obligation under this section shall cease to exist after, the date that is 20 years from the effective time.

e. The assessment of additional taxes, penalties and interest shall be as provided by the State Uniform Tax Procedure Law, R.S.54:48-1 et seq.

13. a. A mutual holding company may convert to a stock holding company by complying with the provisions of sections 2 through 4, 6, 7, 9, 10, and 12 of P.L.2001, c.131 (C.17:48E-50, 17:48E-51, 17:48E-52, 17:48E-54, 17:48E-55, 17:48E-57, 17:48E-58 and 17:48E-60). For purposes of this section, references therein to “health service corporation” shall be deemed to be references to a mutual holding company, and references therein to “domestic stock insurer” shall be deemed to be references to a stock holding company

b. Upon conversion of a mutual holding company to a stock holding company, the fair market value of the mutual holding company shall be transferred in accordance with section 6 of P.L.2001, c.131 (C.17:48E-54).

14. a. The provisions of this act shall be severable; and if any phrase, clause, sentence, or provision is deemed unenforceable, the remaining provisions of this act shall be enforceable.

b. The provisions of this act shall be liberally construed to effectuate its purposes.

15. a. The board of directors of the former health service corporation shall serve as the initial directors of the mutual holding company for a transitional period of 18 months following the effective time, except that during the transitional period:

(1) the Governor, Senate President, and Speaker of the General Assembly may each appoint one additional public director after the effective time with all public directors serving at the pleasure of the appointing authority; and

(2) the board of directors of the former health service corporation may nominate and elect two additional directors who shall serve as directors of the mutual holding company upon the effective time.

b. Subsequent to the transitional period, the board of directors of the mutual holding company shall be constituted in accordance with subsection c. of this section, and elected by its members at the first annual meeting following the transitional period in accordance with the mutual holding company’s bylaws.

c. The board of the mutual holding company shall consist of 22 directors as follows:

(1) 13 directors shall be elected, as provided in the bylaws;

(2) 5 directors shall be public directors appointed by the Governor with the advice and consent of the Senate;

(3) 2 directors shall be public directors appointed by the Senate President; and

(4) 2 directors shall be public directors appointed by the Speaker of the General Assembly.

d. Each elected director shall have a term and a term limit as specified in the bylaws of the mutual holding company. The chief executive officer or president of the mutual holding company shall be a director at all times and shall not be subject to any term limit. Each director shall be free from conflicts of interest that would prohibit such person from fully executing their duties as a director. Each public director shall serve at the pleasure of the appointing authority.

16. a. Upon the formation of a mutual holding company, the total number of full-time employees that were employed within a mutual holding company system shall be maintained for a transition period of 48 months following that formation based on the full-time employee count as of September 30, 2019, except as provided in subsection b. of this section.

b. This section shall not:

(1) supersede the terms of any collective bargaining agreement; or

(2) require a mutual holding system to replace positions vacated by voluntary attrition or terminations for cause, including for performance, or replace positions lost due to a decline in enrollment, market share, or loss of a major account.

17. This act shall take effect immediately.

STATEMENT

This bill allows a health service corporation to reorganize to create a mutual holding company system pursuant to a plan of reorganization at the same time it transitions to become a mutual insurer.

Specifically, the bill allows a health service corporation organized pursuant to P.L.1985, c.236 (C.17:48E-1 et seq.) to reorganize to create a mutual holding company system pursuant to a plan of reorganization at the same time it applies to transition to a mutual insurer pursuant to P.L.1995, c.196 (C.17:48E-45 et seq.). Thereafter, the reorganized entity including any of its non-insurance subsidiaries and insurance company subsidiaries will not be qualified as a health service corporation and will not be subject to the laws, rules, or regulations pertaining to a health service corporation except for certain purposes specified in the bill.

The bill requires the mutual holding company system to consist of a mutual holding company and one or more controlled subsidiaries, including the former health service corporation, and to be operated for the benefit of its members.

The bill provides a mutual holding company and each of its non-insurance subsidiaries, other than the former health service corporation and any insurance company subsidiaries, may not be an insurer, authorized to transact the business of insurance, or qualified as an insurer.

The bill provides that the writing of insurance is permitted only through the former health service corporation and other insurance company subsidiaries or investments of the mutual holding company. The bill does not alter the oversight of the commissioner with respect to the mutual holding company and its non-insurance subsidiaries provided for under applicable laws and rules of this State relating to insurance holding company systems.

The bill requires a mutual holding company to be a nonprofit entity incorporated under, and to conduct its business pursuant to, the provisions of Title 15A of the New Jersey Statutes, except in situations in which the provisions of that title are inconsistent with the provisions of the bill.

The bill provides that, at the effective time of the transition and reorganization, members shall receive membership interests of the mutual holding company, and thereafter 100 percent of the membership interests of the mutual holding company shall continue to be held by members, in each case, in the manner set forth in the articles of incorporation and bylaws of the mutual holding company.

Under the bill, all of the initial shares of the capital stock of the former health service corporation must be issued either to the mutual holding company, or to one or more intermediate holding companies that are wholly owned by the mutual holding company. This restriction does not preclude, subject to the approval of the commissioner, the transfer of existing, or subsequent issuance of additional, shares of stock by the former health service corporation, provided the mutual holding company at all times owns, directly or indirectly through one or more intermediate holding companies, a majority of the voting shares of the capital stock of the former health service corporation.

The bill provides that a health service corporation may submit an application to form a mutual holding company system at the same time the corporation submits an application to transition to a mutual insurer. Prior to submission of the application, the board of directors of a health service corporation are required to adopt a resolution to form a mutual holding company system and transition to a mutual insurer, at a meeting of the board by a two-thirds affirmative vote of the total number of directors of the health service corporation. A copy of the minutes of the meeting at which that resolution is adopted must be filed with the commissioner.

In addition to including information required pursuant to current law for the plan of mutualization, with respect to the formation of a mutual holding company system for purposes of this provision, the bill requires the plan to include:

(1) Descriptions, consistent with the requirements set forth in the bill, of the structure of the mutual holding company system, the qualifications for members’ membership in, and the rights of members of, the mutual holding company, and the transactions, and parties to those transactions, that will affect the mutualization and reorganization;

(2) The identity of those persons who shall serve as directors and officers of the mutual holding company, its intermediate holding companies, if any, and its subsidiaries, including the former health service corporation;

(3) Information sufficient to demonstrate that the financial condition of the former health service corporation and the insurance company subsidiaries of the former health service corporation will meet solvency requirements under applicable laws and rules of this State;

(4) A representation that, following the mutualization and reorganization, the material terms and conditions of insurance coverage of:

(b) all other policyholders shall remain in full force and effect under policies transferred to and assumed by insurance company subsidiaries of the mutual holding company; and

(5) A representation that, following the mutualization and reorganization, the material terms and conditions of subordinated surplus notes and other contractual obligations of the health service corporation and its subsidiaries shall remain in effect upon the transfer of those obligations to the subsidiary legacy stock insurer and one or more other subsidiaries of the mutual holding company.

Under the bill, upon an affirmative vote of the board of directors, the plan to form a mutual holding company system and to transition to a mutual insurer shall be filed with the commissioner for approval. The commissioner is required to review the plan to mutualize and reorganize in accordance with the requirements of current law, which requires the commissioner to conduct a public hearing on the transition plan. Consistent with current law, the commissioner must approve a plan of mutualization and reorganization unless the commissioner finds the plan is contrary to law, would be detrimental to the safety or soundness of the proposed subsidiary legacy stock insurer and insurance company subsidiaries of the proposed mutual holding company, or prejudices the interests of the policyholders of the health service corporation or treats them inequitably.

Under the bill, at the expiration of 30 days after the public hearing, the commissioner is required to approve or disapprove the plan of mutualization and reorganization. The commissioner is required to inform the health service corporation of the specific reasons for the disapproval of any plan of mutualization and reorganization and provide a cure period of no shorter than 90 days to cure any deficiencies. Any disapproval is subject to judicial review as the final decision of a State administrative agency.

A plan of mutualization and reorganization may be amended, terminated, or approved consistent with the bill. A plan of mutualization and reorganization adopted by the board of directors of the applicant may be amended by the board of directors of the applicant in response to the comments or recommendations of the commissioner or terminated at any time.

An approved plan of mutualization and reorganization is effective at the effective time specified in the plan of reorganization, or such other time subsequently requested by the applicant and agreed to by the commissioner.

Under the bill, membership in a mutual holding company is to be determined in accordance with the mutual holding company’s articles of incorporation and bylaws and may be based upon:

(1) the amount of health insurance in force with the subsidiary legacy stock insurer;

(2) the amount of the health insurance premiums paid to the subsidiary legacy stock insurer; or

(3) other reasonable factors.

The bill provides that members of a mutual holding company are entitled to vote for the election of directors of the mutual holding company in accordance with the mutual holding company’s bylaws. Directors of the mutual holding company shall be elected from nominees selected by the nominating and governance committee of the board of directors of the mutual holding company, or a comparably authorized committee.

Upon any voluntary dissolution of a mutual holding company in accordance with current law, the bill requires the mutual holding company to adopt a plan of dissolution in accordance with N.J.S.15A:12-8.

The bill requires a mutual holding company to file with the commissioner, by May 1 of each year, an annual statement consisting of an income statement, balance sheet, and cash flow statement prepared in accordance with generally accepted accounting principles, as amended from time to time, and a confidential statement disclosing any intention to pledge, borrow against, alienate, hypothecate, or in any way encumber the assets of the mutual holding company. A mutual holding company must also have an annual audit by an independent certified public accountant in a form approved by the commissioner and file the audit on or before June 1 of each year for the year ended December 31 immediately preceding.

All information, documents and copies of information and documents obtained by or disclosed to the commissioner, the Department of Banking and Insurance, or any other person in the course of preparing, filing or processing an application to reorganize pursuant to the bill, are subject to the confidentiality requirements provided pursuant to current law.

On June 1 of the next calendar year following the calendar year of the effective time of the transition and reorganization, the mutual holding company is required to pay an initial assessment to the State Treasury in the amount of $200,000,000.

Following the initial assessment, the mutual holding company is required to pay to the State Treasury by June 1 of each subsequent calendar year an annual assessment for a period of six years. The total assessment, including both the initial and annual assessments, may not exceed $1,000,000,000. The annual assessments are required to adhere to the following schedule:

(1) For annual assessment 1, 2 percent of the mutual holding company’s consolidated annual revenue for the calendar year preceding this assessment, with this assessment not to exceed $200,000,000.

(2) For annual assessment 2, 2 percent of the mutual holding company’s consolidated annual revenue for the calendar year preceding this assessment, with this assessment not to exceed $200,000,000.

(3) For annual assessment 3, 1 percent of the mutual holding company’s consolidated annual revenue for the calendar year preceding this assessment, with this assessment not to exceed $100,000,000.

(4) For annual assessment 4, 1 percent of the mutual holding company’s consolidated annual revenue for the calendar year preceding this assessment, with this assessment not to exceed $100,000,000.

(5) For annual assessment 5, 1 percent of the mutual holding company’s consolidated annual revenue for the calendar year preceding this assessment, with this assessment not to exceed $100,000,000.

(6) For annual assessment 6, 1 percent of the mutual holding company’s consolidated annual revenue for the calendar year preceding this assessment, with this assessment not to exceed $100,000,000.

The bill provides that the mutual holding company is not required to pay any portion of the annual assessment for a given calendar year if the mutual holding company’s system-wide health risk-based capital authorized control level would fall below 550 percent based on the standards for risk based capital for health organizations as adopted by the National Association of Insurance Commissioners following the payment as applied against the prior calendar year’s risk based capital, or in the opinion of any nationally recognized statistical rating organization, the group credit rating of the mutual holding company would not be considered investment grade.

If the mutual holding company does not pay the annual assessment for a given calendar year, the annual assessment that was not paid is to be deferred to the subsequent calendar year with all future annual assessments also deferred by another calendar year so that no two annual assessments are due in the same calendar year. In the case of a deferred assessment, the percentage payment by the mutual holding company shall be for either the calendar year originally assessed, or the calendar year preceding the deferred payment, whichever is greater, provided that the no payment shall exceed the limitations for the respective scheduled payment step.

Notwithstanding the foregoing, the assessment years are not to be extended beyond, and the payment obligation ceases to exist after, the date that is 20 years from the effective time.

The bill provides that a mutual holding company may convert to a stock holding company by complying with certain provisions of current law. For purposes of the bill, references in current law to “health service corporation” are deemed to be references to a mutual holding company, references in current law to “domestic stock insurer” are deemed to be references to a stock holding company.

The bill provides that, upon conversion of a mutual holding company to a stock holding company, the fair market value of the mutual holding company shall be transferred to a foundation in accordance with section 6 of P.L.2001, c.131 (C.17:48E-54).

The bill provides that the board of directors of the former health service corporation shall serve as the initial directors of the mutual holding company for a transitional period of 18 months following the effective time. The Governor, the Senate President, and the Speaker of the General Assembly may each appoint an additional public director, in addition to the directors appointed to the board of directors of the former health service corporation pursuant to section 7 of P.L.1985, c.236 (C.17:48E-7).

Subsequent to the transitional period, the board of directors of the mutual holding company is required to be constituted in accordance with the bill, and elected by its members at the first annual meeting following the transitional period in accordance with the mutual holding company’s bylaws.

The bill requires the board of the mutual holding company to consist of 22 directors as follows:

(1) 13 directors shall be elected, as provided in the bylaws;

(2) 5 directors shall be public directors appointed by the Governor with the advice and consent of the Senate;

(3) 2 directors shall be public directors appointed by the Senate President; and

(4) 2 directors shall be public directors appointed by the Speaker of the General Assembly.

The bill provides that each elected director shall have a term and a term limit as specified in the bylaws of the mutual holding company. The chief executive officer or president of the mutual holding company shall be a director at all times and shall not be subject to any term limit. Each director shall be free from conflicts of interest that would prohibit such person from fully executing their duties as a director. Each public director shall serve at the pleasure of the appointing officer.

The bill requires a mutual holding company to maintain the total number of full-time employees of the former health service corporation for a transition period of 48 months following the effective time of the mutualization and reorganization.