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STATE OF MAINE
DEPARTMENT OF PROFESSIONAL AND FINANCIAL REGULATION
BUREAU OF INSURANCE

 

INTRODUCTION AND BACKGROUND

Pursuant to Notice dated September 10, 1998, a hearing was conducted on October 16, 1998 in accordance with 24-A M.R.S.A. 222, 3476, and 3477 to consider (i) the proposal of Compensation Mutual Insurance Company ("Compensation Mutual") to convert from a mutual insurance company to a stock insurance company, and (ii) the application of Acadia Insurance Company ("Acadia") to acquire control of Compensation Mutual after the conversion. Notice of the hearing was published on September 16 and September 23, 1998 in the Portland Press Herald, Bangor Daily News, Lewiston Sun-Journal, Waterville Sentinel, and Kennebec Journal. Acadia also provided a copy of the Notice of Hearing to the Maine Workers’ Compensation Residual Market Pool (the "Pool"), which, in a letter dated October 15, 1998, expressed its support for the conversion plan. The Pool did not participate in the October 16, 1998 hearing.

After the conversion of Compensation Mutual and the acquisition of control by Acadia, Compensation Mutual will be named Cadillac Mountain Insurance Company ("Cadillac Mountain"). The hearing was conducted by Alessandro A. Iuppa, Superintendent of Insurance, Maine Bureau of Insurance (the "Superintendent"). Superintendent Iuppa was assisted by the following Bureau of Insurance staff: Richard Johnson, Property and Casualty Actuary; Thomas Record, Senior Staff Attorney; and Stuart Turney, Managing Examiner; Judith Chamberlain, Assistant Attorney General, provided legal counsel to the Superintendent. The purpose of the hearing was to take evidence relevant to a determination whether the proposed conversion and acquisition satisfy all requirements applicable thereto, including 24-A M.R.S.A. 222, 3476, and 3477, and Maine Bureau of Insurance Rules, Chapter 180.

Compensation Mutual and Acadia intend to effect the proposed conversion and acquisition pursuant to an Agreement and Plan of Reorganization (the "Reorganization Agreement") dated as of August 28, 1998, and amended as of October 9, 1998, including the Plan of Recapitalization and Demutualization (the "Demutualization Plan") that is attached thereto. The Reorganization Agreement is attached as Exhibit A to the Form A, Statement Regarding the Acquisition of Control of or Merger with a Domestic Insurer (the "Form A") that Acadia filed with the Superintendent on August 28, 1998 pursuant to the requirements of 24-A M.R.S.A. 222(4-A). The Demutualization Plan, as amended on October 9, 1998, was approved by Compensation Mutual’s Board of Directors. Likewise, the Presidents of Acadia and Compensation Mutual signed the Reorganization Agreement, as amended on October 9, 1998. The Demutualization Plan is attached as Appendix A to the Reorganization Agreement. In addition to the Reorganization Agreement and the Demutualization Plan, the exhibits to Form A include a proposed Agreement of Reinsurance and a proposed Management Agreement between Acadia and Cadillac Mountain, a Business Plan for Cadillac Mountain, Financial Projections of Acadia and Cadillac Mountain, and the Financial Statements of the parties. The Superintendent ordered that the Business Plan and the Financial Projections be accorded confidential treatment pursuant to a Protective Order dated September 10, 1998.

The designated parties to the hearing were Compensation Mutual and Acadia. James B. Zimpritch, Esq., and Steven J. Scott, Esq., of Pierce Atwood, Portland, Maine, represented the parties at the hearing. No person petitioned to intervene as a party to the hearing, whether prior to or at the time of the hearing.

Charles Hamblen, Acadia’s and Compensation Mutual’s Vice President—Finance and Treasurer, provided oral testimony at the hearing on behalf of Compensation Mutual and Acadia, including testimony in response to questions presented by members of the Bureau of Insurance. No other witnesses presented testimony at the hearing.

SUMMARY OF TESTIMONY

Mr. Hamblen provided testimony that Compensation Mutual was created in May 1992 when substantially all insurance companies writing workers’ compensation insurance had withdrawn or filed for permission to withdraw from the market in Maine, and substantially all workers’ compensation insurance was written by companies functioning as servicing carriers, with the risks assigned in their entirety to the Pool. In order to assure the continued availability of a vehicle for the provision of workers’ compensation insurance in Maine, Compensation Mutual was formed as an independent, non-assessable mutual insurance company engaged solely in the business of acting as a servicing carrier for the issuance of workers’ compensation insurance policies for the Pool. Compensation Mutual’s Bylaws stated that the only persons eligible to be members in Compensation Mutual were those seeking workers’ compensation insurance through the Pool. Mr. Hamblen further testified that Compensation Mutual wrote workers’ compensation insurance coverage for Maine employers through December 31, 1992, for on January 1, 1993 the Pool ceased to accept new business pursuant to emergency legislation the Maine legislature passed on October 14, 1992. Since that time, Compensation Mutual has engaged solely in administering the runoff of policies it issued and reinsured with the Pool prior to January 1, 1993.

Mr. Hamblen testified that Compensation Mutual has most recently operated with deficits of ($134,139) and ($152,668) as of December 31, 1997, and June 30, 1998, respectively, and will likely have its capital impaired within a foreseeable period of years. Acadia is interested in acquiring Compensation Mutual and making a substantial additional capital infusion to the equity of Cadillac Mountain as part of the Demutualization Plan. After considering alternatives in the situation, Compensation Mutual’s and Acadia’s Boards of Directors concluded that the transactions set forth in the Reorganization Agreement and the Demutualization Plan represented the best course for Compensation Mutual in substantially enhancing the financial condition of Compensation Mutual for the benefit of injured workers having claims against policies written by Compensation Mutual, and in providing an additional alternative market for property and casualty insurance.

Mr. Hamblen also testified about the necessity of Cadillac Mountain as a separate vehicle for property and casualty insurance. Several of the states in which Acadia writes business do not allow multi-tier pricing in one company. Additionally, several of the states do not allow participating policies in a company unless offered to all insureds. Acadia’s analysis shows the need for two or three companies in each state to allow it the pricing and product flexibility that competitors offer. Many of Acadia’s competitors have three or more companies licensed in each state. Thus, the addition of Cadillac Mountain will allow Acadia to be more competitive.

Testimony provided by Mr. Hamblen illustrates that Acadia proposes to acquire control of Compensation Mutual through a two-step process. The first step is the conversion of Compensation Mutual from a mutual insurance company to a stock insurance company. The terms and conditions of the conversion are set forth in the Demutualization Plan. As part of the transaction, Compensation Mutual will file an Amended and Restated Certificate of Organization under the name Cadillac Mountain that will authorize Cadillac Mountain to issue 500,000 shares of common stock having a par value of $5.00 per share. In the conversion, Compensation Mutual will not make any cash distribution of equity share to policyholders because (1) Compensation Mutual has no policyholders, and (2) excluding the surplus note on which Compensation Mutual owes $2,000,000 plus accrued interest to W.R. Berkley Company, Compensation Mutual has no equity and no surplus.

Assuming that the conversion has received all required approvals, the second step will involve the acquisition by Acadia of all 500,000 shares of Compensation Mutual’s common stock for a purchase price of $5,700,000. Following approval of the Plan by the Superintendent, Cadillac Mountain will file the Amended and Restated Certificate of Organization with the Secretary of State of Maine in the manner provided by 24-A M.R.S.A. 3310. Immediately thereafter, Cadillac Mountain will issue the Conversion Stock to Acadia, subject to Cadillac Mountain’s receipt of the purchase price for such stock.

The amount of the purchase price was arrived at through consideration of statutory capital requirements and the future business needs of Cadillac Mountain. It is Acadia’s intent to have Cadillac Mountain licensed in all states in which Acadia is currently licensed. To satisfy all states’ capital requirements, $2,500,000 in paid-in capital and $3,000,000 in initial free surplus is necessary. Acadia will also infuse an additional $200,000 in free surplus to cover Compensation Mutual’s existing unassigned funds deficiency. Therefore, the payment of the purchase price will result in Cadillac Mountain having paid-in capital of $2,500,000 and initial free surplus of $3,200,000. At the Closing, Acadia shall deliver the purchase price to Cadillac Mountain in such combination of securities acceptable to the Superintendent and cash as Acadia may determine in its sole discretion. Upon receipt of the Purchase Price, Cadillac Mountain shall issue the 500,000 shares of Cadillac Mountain common stock to Acadia. Mr. Hamblen further testified that at the Closing, upon receipt of the Purchase Price for the Cadillac Mountain common stock, Compensation Mutual will repay to W.R. Berkley Company (1) $2,000,000, which is the outstanding balance of the surplus note, and (2) the interest that has accrued on the note as of the date upon which Cadillac Mountain’s Amended and Restated Certificate of Organization has been filed with the Secretary of State of Maine in accordance with applicable law and regulations.

Mr. Hamblen’s testimony described the future relationship of Acadia and Cadillac Mountain. Acadia and Cadillac Mountain intend to enter an Agreement of Reinsurance that is attached as Exhibit C to Form A (the "Reinsurance Agreement"). Under the agreement, Cadillac Mountain will cede, and Acadia will assume 100% of all binders, policies, and contracts of insurance issued or renewed in the states in which Cadillac Mountain is licensed. Acadia will be responsible for all claim handling including the establishment of case reserves, incurred but not reported losses, and all loss expense. Acadia will also (1) allow a ceding commission to Cadillac Mountain based on direct written premiums which will be equal to the sum of commissions paid by Cadillac Mountain and state premium taxes, and (2) reimburse Cadillac Mountain for any and all assessments incurred as a result of writing business, such as guaranty funds or any residual market mechanisms.

Mr. Hamblen also testified that the current intent of Acadia’s management is for Cadillac Mountain to write participating policies only. Participating or dividend policies will be written only for accounts with better than average experience. Therefore, before the business is ceded to Acadia, the loss ratios of Cadillac Mountain are expected to be 50% or lower.

After the conversion, Cadillac Mountain will be a wholly owned subsidiary of Acadia, and Acadia and Cadillac Mountain will enter the Management Agreement attached as Exhibit B to Form A.This agreement provides Acadia with responsibility for doing, within the terms of the agreement, all things necessary and incidental to the conduct of the business. This authority includes the power to act as underwriting manager in the name of Cadillac Mountain as the issuing company, as individual policies require or dictate. Acadia’s power to act on behalf of Cadillac Mountain will also include the acceptance and declination of risks; cancellation and amendment of contracts of insurance; the collection and payment of premiums and return premiums on insurance contracts; the rejection, adjustment, compromise and payment of losses and expenses incidental thereto; the recovery of losses and expenses from its reinsurers; the payment of all applicable taxes (other than premium taxes) and fees imposed by the government or any agency thereof; and the payment of all dues and other expenses connected with the business written under the agreement. Under the Management Agreement, there will be no management fee between the two companies.

Mr. Hamblen also testified that upon conversion, the corporate existence of Compensation Mutual will continue uninterrupted under the name Cadillac Mountain. All rights, privileges, immunities, powers, franchises, and licenses, as well as interests of Compensation Mutual in and to all property, real, personal, and mixed, and all choses in action, shall continue unaffected and uninterrupted by the conversion. Except for the Reinsurance Agreement, the Demutualization Plan shall not be construed to result in any reinsurance or in any real or constructive issuance or exchange of any insurance policy or any other transfer of any assets, rights, or obligations by Compensation Mutual. All duties, obligations, and liabilities of Compensation Mutual shall continue unaffected and uninterrupted by the Conversion. Thus, after the conversion, Cadillac Mountain will, just as Compensation Mutual has done, administer the runoff of the policies Compensation Mutual issued for the Pool. In fact, the conversion will provide increased financial security to Compensation Mutual’s claimants because Cadillac Mountain will have improved financial strength to meet its existing and future obligations. Thus, the overall effect of the Conversion for claimants is positive, for their claims will be backed by a financially stronger company. Finally, no action or proceeding pending on the Effective Date to which Compensation Mutual is a party shall be abated or discontinued by reason of the Conversion.

Mr. Hamblen also provided testimony that if the proposed acqusition is approved, Acadia does not have any plan or proposal to (i) make any change in Cadillac Mountain’s corporate structure, (ii) adversely change Cadillac Mountain’s contractual obligations or future ability to service policyholders, claimants, or the public, or (iii) declare any extraordinary dividend with respect to Cadillac Mountain, sell Cadillac Mountain’s assets, or merge Cadillac Mountain with any other insurance company.

No evidence was presented that would demonstrate that the proposed control of Cadillac Mountain would (i) lessen competition in insurance in Maine, (ii) create a monopoly in the business of insurance in Maine, or (iii) not be in the best interests of Cadillac Mountain, injured workers having claims against policies written by Compensation Mutual, or of the general public. There is also no evidence that the Demutualization Plan will financially benefit management.

In addition to these matters, Mr. Hamblen answered questions from the Superintendent and Bureau staff members on topics including (1) the costs of the demutualization process, (2) the amount of interest on the Surplus Note owing to W.R. Berkley Co., (3) the servicing of Compensation Mutual’s remaining claims, (4) the type of securities that will form part of the consideration for Acadia’s acquisition of Cadillac Mountian, (5) the business plans of Cadillac Mountain and the types of policies it will write, (6) the cycle and calculation of, as well as determination of eligibility for, dividends for Cadillac Mountain policies, (7) Cadillac Mountain’s gross premiums, (8) projected losses of Compensation Mutual for the third quarter of 1998, (9) the cause of Compensation Mutual’s unassigned funds deficiency, (10) the management arrangement, including fees, between Cadillac Mountain and Acadia, and (11) the Reinsurance Agreement.

 

FINDINGS

Based upon the testimony and the evidence introduced into the record of this hearing, the Superintendent finds as follows:

1. The testimony and evidence presented by Compensation Mutual establishes that the conversion of Compensation Mutual is being sought to further appropriate business objectives. As Mr. Hamblen testified, Compensation Mutual has recently operated with deficits of surplus funds and will likely have its capital impaired within a foreseeable period of years. Compensation Mutual’s conversion to stock form will allow the infusion of capital through Acadia’s purchase of Compensation Mutual’s common stock. This conversion and stock purchase will substantially enhance the financial condition of Compensation Mutual, which will both benefit the injured workers having claims against policies written by Compensation Mutual, and provide an additional alternative market for property and casualty insurance. These developments are in the best interests of Compensation Mutual, its claimants, and the general public.

2. The Demutualization Plan provides that after Compensation Mutual has been converted to a stock insurance company it will have total capital in an amount not less than (i) the minimum paid-in capital stock required of a new domestic stock insurance company upon initial authorization to transact like kinds of insurance, together with (ii) expendable surplus funds in an amount not less than one-half of such required capital stock. Mr. Hamblen testified Cadillac Mountain will have $2,500,000 in paid-in capital and $3,200,000 of initial free surplus clearly satisfying the requirements of the statute.

3. The testimony and evidence provided by Compensation Mutual demonstrates that Compensation Mutual’s management has not, through reduction in volume of new business written, through cancellation of insurance policies, or through any other means sought to reduce, limit, or affect the number or identity of Compensation Mutual’s policyholders who are entitled to participate in the conversion of Compensation Mutual to a stock insurance company, or to secure for the individuals comprising Compensation Mutual’s management any unfair advantage through such conversion. Rather, Compensation Mutual’s lack of policyholders is the result of the purpose for its creation and later action by the Maine Legislature that obviated the need for Compensation Mutual to continue to write policies according to its purpose. Compensation Mutual was formed in May 1992 as a servicing carrier, and the only persons eligible to be members in Compensation Mutual were those seeking workers’ compensation insurance through the Maine Workers’ compensation Residual Market Pool. Compensation Mutual wrote workers’ compensation insurance coverage for Maine employers from its formation through December 31, 1992. On January 1, 1993, the Pool ceased to accept new business pursuant to emergency legislation passed by the Maine Legislature. Since that time, Compensation Mutual has written no policies and has engaged solely in administering the runoff of policies it issued for the Pool prior to January 1, 1993.

4. 24-A M.R.S.A. 3477 enumerates the requirements for a mutual insurer’s conversion to a stock insurer. Among the statute’s standards are provisions for (1) policyholder approval by two-thirds of those policyholders that vote in the conversion, and (2) fair and equitable treatment of policyholders in acquiring the equity of the insurer. Id. 3477(2)(A) – (G) (the "policyholder provisions"). Compensation Mutual will not be required to comply with statutory requirements (1) that, if applied to prevent the conversion, would violate fundamental principles of statutory interpretation, (2) that have no application to a situation beyond the Legislature’s contemplation when it passed 3477, and (3) that the company cannot meet as a result of past action by the State itself.

To prevent Compensation Mutual’s conversion on the ground that it cannot comply with the policyholder provisions would violate a fundamental principle of statutory construction that Maine courts follow repeatedly: the plain language of a statute does not apply where it will lead to an absurd result. See Town of North Yarmouth v. Moulton, 710 A.2d 252, 254 (Me. 1998); Doe v. Department of Mental Health, Mental Retardation, and Substance Abuse Servs., 699 A.2d 422, 424 (Me. 1997); Interstate Food Processing Corp. v. Town of Fort Fairfield, 698 A.2d 1074, 1075-76 (Me. 1997). The purpose of the policyholder provisions is undoubtedly to protect the interests and financial position of policyholders. Here, although Compensation Mutual has no policyholders, the conversion will (1) improve the company’s financial health, thereby benefiting existing workers’ compensation claimants with active claims, and (2) create an additional property and casualty insurer in Maine. Given Compensation Mutual’s history and purpose as described above (as well as its present condition), conversion, an infusion of capital, and the concomitant enhancement of the company’s and the claimants’ positions, are all in the public interest.

Therefore, the Superintendent of Insurance will not apply a statute to achieve a result that is illogical and adverse to the public interest. See South Portland Civil Serv. Comm’n v. City of South Portland, 667 A.2d 599, 601 (Me. 1995); Fraser v. Barton, 628 A.2d 146, 148 (Me. 1993). Rather, the Legislature must have intended, as a condition to application of the policyholder provisions, that policyholders exist—to decide otherwise would lead to an illogical result. See League of Women Voters v. Secretary of State, 683 A.2d 769, 773 (Me. 1996); see also Reich v. Bath Iron Works Corp., 42 F.3d 74, 78 (1^st Cir. 1994). Interpreting the statute to require the existence of policyholders before applying the policyholder provisions would vindicate the legislative intention to protect policyholders by requiring compliance with the provisions before a demutualization can occur. As a result of this rational interpretation, the policyholder provisions of 3477 are inapplicable to the Compensation Mutual demutualization.

5. Cadillac Mountain will, after the proposed change of control has been effected, satisfy the requirements under Maine law for the issuance of a Certificate of Authority to transact the types of insurance that it intends to transact in Maine.

6. Acadia’s acquisition of Cadillac Mountain will not have the effect of substantially lessening competition in insurance in Maine, will not tend to create a monopoly in the business if insurance in Maine, and will not violate the laws of the State of Maine or of the United States relating to monopolies or restraints of trade.

7. Acadia’s financial condition will not jeopardize the financial stability of Cadillac Mountain or prejudice the interests of injured workers having claims against policies written by Compensation Mutual.

8. Acadia does not have any plans or proposals to liquidate Cadillac Mountain, sell its assets, merge it with any person, or make any other major change in its business, corporate structure, or management that would be unfair or prejudicial to injured workers having claims against policies written by Compensation Mutual or Cadillac Mountain’s future policyholders.

9. The competence, experience, and integrity of those persons who will control Cadillac Mountain’s business operations after Acadia has acquired Cadillac Mountain are such that the interests of Cadillac Mountain’s claimants and future policyholders and the general public will not be prejudiced or adversely affected.

10. Acadia’s acquisition of Cadillac Mountain will not adversely affect the contractual obligations of Cadillac Mountain or its ability and tendency to render service in the future to injured workers having claims against policies written by Compensation Mutual or Cadillac Mountain’s policyholders and the public.

11. The proposed Management Agreement and the proposed Agreement of Reinsurance that are attached respectively as Exhibits B and C to the Form A satisfy the requirements set forth in 24-A M.R.S.A. 222 and in Maine Bureau of Insurance Rules, Chapter 180.

12. Based upon these findings, I conclude that the terms and conditions of the proposed conversion as set forth in the Demutualization Plan are fair and equitable.

ORDER

For the foregoing reasons, and based upon the testimony and other evidence entered into the record of this hearing, the following is hereby ordered:

1. The conversion of Compensation Mutual from a mutual insurance company to a stock insurance company as provided in the Demutualization Plan is approved and the policyholder provisions, as defined in Finding 4, are inapplicable to the Compensation Mutual conversion.

2. The acquisition of control of Compensation Mutual by Acadia, as provided in the Reorganization Agreement and Form A, is hereby approved, subject to the following condition that immediately following the acquisition, Cadillac Mountain shall have paid-in capital in the amount of $2,500,000, together with initial free surplus of not less than one-half the amount of paid-in capital.

3. The Management Agreement and the Agreement of Reinsurance that are attached respectively as Exhibits B and C to Form A are hereby approved, subject to the following condition that the Management Agreement and the Agreement of Reinsurance that Cadillac Mountain and Acadia execute shall conform to the copies of those agreements that are attached respectively as Exhibits B and C to Form A, unless such revisions to those agreements that may be desired by Cadillac Mountain and Acadia shall have been approved in writing by the Superintendent of the Bureau of Insurance.

4. The Agreement of Reinsurance attached as Exhibit C to Form A is subject to the further condition that any amendments to material terms of the Agreement are subject to the prior approval of the Superintendent.

5. Compensation Mutual shall, at the time Acadia acquires the capital stock of Cadillac Mountain as authorized pursuant to this Decision and Order, repay to W.R. Berkley the principal balance of $2,000,000 on the surplus note together with interest accrued thereon as of the date upon which Cadillac Mountain’s Amended and Restated Certificate of Organization has been filed with the Secretary of State of Maine in accordance with applicable law and regulations.

6. Cadillac Mountain shall notify the Superintendent immediately of any conditions for licensure and operation imposed upon Cadillac Mountain and/or Acadia by other jurisdictions including any conditions imposed as a result of a change in control of Cadillac Mountain.

NOTICE OF APPEAL RIGHTS

This Decision and Order is final agency action within the meaning of the Maine Administrative Procedure Act. Any party to this proceeding may seek judicial review of this Decision and Order pursuant to 5 M.R.S.A. 11001-11008 and 24-A M.R.S.A. 236 by filing a petition for review in the Maine Superior Court within 30 days after such party’s receipt of notice of this Decision and Order.

Any other person who is aggrieved by this Decision and Order may attempt to obtain judicial review, to the extent such review is permitted by law, pursuant to the statutory provisions cited in the immediately preceding sentence, by filing a petition for review in the Maine Superior Court within 40 days from the date of this Decision and Order.

 

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