ORDER NO. A01-154

STATE OF NEW JERSEY

DEPARTMENT OF BANKING AND INSURANCE

IN THE MATTER OF THE REQUEST )
OF THE PRUDENTIAL INSURANCE )
COMPANY OF AMERICA FOR ) DECISION AND ORDER
PAYMENT OF THE DESTACKING )
EXTRAORDINARY DIVIDEND IN )
CONNECTION WITH ITS PLAN OF )
REORGANIZATION )

This matter has been opened by the Commissioner of the Department of Banking and Insurance ("Commissioner") pursuant to the authority of N.J.S.A. 17:1-15 and 17:27A-4, N.J.A.C. 11:1-35, and all powers expressed or implied therein, regarding the request of The Prudential Insurance Company of America ("Prudential") for payment of a destacking extraordinary dividend in connection with its proposal to reorganize as a stock insurer. Prudential submitted a filing dated June 21, 2001 ("Form D filing") pursuant to N.J.S.A. 17:27A-4 and N.J.A.C. 11:1-35.10, as supplemented on August 3, 2001 and October 2, 2001. On June 21, 2001, Prudential, on behalf of itself and its affiliates, also requested an exemption pursuant to N.J.S.A. 17:27A-2f(2)(a) from the filing and other requirements under N.J.S.A. 17:27A-2 in connection with the Form D filing.

In connection with the conversion of Prudential to a stock insurer, referred to as "demutualization" (discussed under Order No. A01-153, issued simultaneously herewith), Prudential proposes to reorganize so as to remove from ownership by Prudential, by way of an extraordinary dividend, certain groups of companies that currently are subsidiaries of Prudential. This process is referred to as the "destacking". The destacking will be effected by means of the destacking extraordinary dividend by Prudential to Prudential Holdings, LLC, and ultimately to Prudential Financial, Inc. After demutualization, Prudential Holdings, LLC will become Prudentialís immediate parent, and Prudential Financial, Inc. will become Prudentialís ultimate parent. The destacking extraordinary dividend will consist of the equity interests of certain subsidiaries of Prudential and other assets and liabilities of non-insurance entities of Prudential as specified in its plan to demutualize ("Plan"), and the Form D application for approval of this destacking extraordinary divdend.

Specifically, Prudential proposes to declare a dividend of the stock of, or other interests in, those subsidiaries engaged, directly or through their respective subsidiaries, in the following general business categories:

  1. Property and casualty insurance;
  2. Principal securities brokerage;
  3. International insurance;
  4. Principal asset management;
  5. International securities and investments;
  6. Domestic banking;
  7. Residential real estate brokerage franchise; and
  8. Relocation services.

These companies include approximately 340 separate direct and indirect subsidiaries of Prudential. These companies and certain assets and liabilities relating to these businesses had an aggregate book value of approximately $4.216 billion as of June 30, 2001.

The destacking will occur initially by transferring ownership of various Prudential companies by way of contributions by Prudential of the capital stock of various subsidiaries, and in the case of the asset management and international insurance business, certain assets and liabilities of Prudential relating to these businesses presently carried out or held directly by Prudential, to various other Prudential subsidiaries (most of these contributions will result in the establishment of downstream holding companies for the realigned subsidiaries); and then by distributions, in the form of dividends, of the capital stock of various Prudential subsidiaries, including the downstream holding companies, to Prudential Financial, Inc.

Prudential has asserted that the destacking will, among other things: (a) reduce Prudentialís exposure to the earnings volatility of its property-casualty, broker-dealer, and other operations; (b) reduce the percentage of Prudentialís capital invested in subsidiaries to a level that is comparable to that of other large life insurers; (c) improve capital efficiency by separating ownership of international life insurance operations from Prudential, thereby eliminating unnecessary capital redundancies; and (d) better position Prudential for possible ratings improvements due to improved financial flexibility from a horizontal organizational structure.

Both Department staff and its consultants performed an analysis of the transaction. The analysis and resulting conclusions are dependent on the accuracy of the data and representations as prepared or stated by Prudential and are discussed below.

1) The analysis of the pro forma RBC ratio after destacking (calculated as Total Adjusted Capital divided by Authorized Control Level Risk-Based Capital) concluded that the ratio would remain at a level indicative of a financially stable company. The pro forma calculations presented by Prudential as of December 31, 2000 appear consistent with RBC procedures as required by the RBC formula prescribed by the NAIC as of December 31, 2000 and indicated that after the destacking, Prudential will have adequate capital and surplus to satisfy policyholder and other obligations.

2) An analysis of the Five Year Business Plan was also performed and it was concluded that the projections were reasonably stated.

3) Policies regarding lending from Prudential to affiliates in the holding company system were also reviewed to ensure that Prudential is not adversely affected by guaranteeing loans that have the potential of default in the future. Prudential committed to begin to limit the amount of loans to affiliates and to phase out loans to destacked affiliates by December 31, 2004 with all loans gradually originating with Prudential Financial, Inc.

Accordingly, the Department has determined that Prudential may proceed with the destacking in the form as presented to the Department subject to the following conditions:

1) If the destacking is not completed by December 31, 2001, then the following conditions must be satisfied:

    1. The Risk Based Capital (RBC) ratio of The Prudential Insurance Company of America, calculated on the same basis as that in the 2000 Annual Statement, must be at least 210% (Total Adjusted Capital divided by the Company Action Level RBC). The calculation is to be performed as of the most recent quarter or year end, as if RBC were required for that quarter.
    2. Management must represent at closing that, to the best of its knowledge, after inquiry, no event has occurred that would reasonably be expected to result in failure to achieve a 210% RBC ratio.

2) The amount of the destacking dividend shall not increase more than $200 million as a result of capital contributions or purchases, from the approximately $4.216 billion amount reported as of June 30, 2001 in the October 2, 2001 filing to the Department, supplementing the June 21, 2001 Form D filing, without the prior written approval of the Commissioner for any such increase in the amount of the destacking dividend; and

3) The lending limits and post-demutualization policies for Prudential Funding, LLC are in compliance with the policies submitted to the Department in letters dated April 25, 2001 and June 1, 2001; and Prudential Global Funding, Inc. post-demutualization policies are in compliance with the policies submitted to the Department in letters dated March 27, 2001 and June 29, 2001.

THEREFORE, IT IS on this 15th day of October 2001 ORDERED that Prudential's request for payment of the destacking extraordinary dividend is approved, subject to the conditions set forth herein.

IT IS FURTHER ORDERED that Prudentialís request for an exemption of the filing and other requirements in N.J.S.A. 17:27A-2 in connection with the transactions set forth in the Form D filing is approved pursuant to N.J.S.A. 17:27A-2f(2).

/s/ Donald Bryan

Donald Bryan

Acting Commissioner for Insurance