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Life Health > Life Insurance > Term Insurance

Pru Takes Some Fire At N.J. Demutualization Hearing

By Trevor Thomas

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NU Online News Service, July 19, 2:05 p.m. – A public hearing on Prudential Insurance Company of America’s demutualization plan, ended Wednesday in Trenton, N.J., after two days of volleys of conflicting testimony.

Some policyholders, former employees and consumer advocates argued that the plan may not compensate policyholders as fairly as it should.

Art Ryan, Prudential’s chief executive officer, and a battery of other Prudential executives provided a vigorous defense.

All told, about 35 people testified, according to an unofficial count from the state’s Department of Banking and Insurance, which held the meeting.

If New Jersey Banking and Insurance Commissioner Karen Suter agrees, the demutualization plan would take ownership of Prudential out of the hands of policyholders and put it in the hands of public stockholders.

Ryan testified that demutualization would promote the best interests of Prudential’s policyholders.

Converting to a publicly owned entity would enable the company to provide shares of stock to its policyholders, giving their interest in the company a tangible value, Ryan said.

Converting would also give the company an infusion of capital that it could use to expand, Ryan added.

“These changes will enable Prudential to continue to grow both through internal means and through being better positioned to take advantage of opportunities,” Ryan testified.

Ryan said Prudential needs capital to add new products, acquire other companies, and compete globally in a world where insurers, banks and other financial services companies are continuing to consolidate.

“Furthermore, demutualization will enable us to use stock-based compensation programs to recruit and retain high-quality employees,” he said.

One critic of the plan argued it was unfair to most policyholders.

Thomas P. Tierney, a consulting actuary called to testify by an attorney representing three Prudential policyholders, said the allocation of shares under the plan would credit recent customers with too large a value for their policies, thereby depriving long-term policyholders of their fair share of the Prudential pie.

The plan also has other provisions that would dilute the value of policyholder shares, he insisted. For instance, some owners of policies issued by Prudential’s Pruco division, starting in the 1980s, are supposedly nonparticipating policyholders. Yet the plan calls for treating them as participating, by awarding them shares, he said.

Antitakeover provisions of the plan also would dilute current policyholders’ interest in the company, Tierney argued, by making potential acquirers shy away.

Michael Malakoff, a Pittsburgh attorney representing the three policyholders, added that policyholders could lose out if they decided to take cash instead of stock for the value of their policies, and then the stock price subsequently soared.

Prudential countered with testimony from its own actuary as well as an outside actuary from the Washington office of Milliman USA Inc., a consulting firm. They testified that the method used by Prudential to allocate shares was fair and equitable.

Following the meeting, Prudential spokesperson Robert DiFilippo said Malakoff was “confused” and “not correct” about the valuation of the company.

Customers owning policies from the Pruco subsidiary, even though they had nonparticipating policies technically, nevertheless had a reasonable expectation that their products contributed to the company’s surplus, he argued. In the interest of fairness, therefore, Prudential believed they should be included in the plan.

Prudential’s filing with the SEC says the company will float 89 million shares, raising an estimated $3.9 billion from investors.

The company had total revenues of $26.5 billion last year and adjusted operating income of almost $2.3 billion. Its total equity was $20.6 billion and total assets almost $273 billion.

A spokesperson for Commissioner Suter said she was expected to make a decision on the plan within 45 days after the Aug. 17 deadline for submission of written public comments.

At Suter’s direction, Prudential mailed ballots to its more than 10 million policyholders in May along with extensive information about the demutualization plan. Before Prudential can convert, at least 1 million of those policyholders must vote on whether the company should become a publicly traded stock company. The voting period will end July 31.

Under a state law enacted last year specifically to permit Prudential to try to demutualize, the plan must be approved by at least two-thirds of the policyholders voting.

Prudential’s DeFilippo declined to comment on whether the company thinks it has enough votes, but he said the balloting is “on target.”

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