DEPARTMENT OF BANKING AND INSURANCE
IN THE MATTER OF THE PLAN OF REORGANIZATION)
OF THE PRUDENTIAL INSURANCE ) DECISION AND ORDER
COMPANY OF AMERICA )
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 17:17C-1 et seq., and all powers expressed or implied therein, regarding the application for approval of a plan to reorganize as a stock company filed by The Prudential Insurance Company of America ("Prudential" or the "company") in accordance with N.J.S.A. 17:17C-1 et seq.
Prudential is a New Jersey domiciled mutual insurer, which was originally formed in New Jersey as a stock insurance company in 1873, and subsequently converted from a stock insurance company into a mutual insurance company in 1943. Prudential began selling policies in 1875 and is now licensed to conduct insurance business in all 50 states and in numerous other jurisdictions. Prudential owns numerous insurance subsidiaries and subsidiaries engaged in related financial services, which are incorporated in New Jersey or various jurisdictions in the United States and throughout the world. Prudential directly and through its insurance subsidiaries transacts insurance business throughout the United States and in various countries throughout the world. Prudential and its subsidiaries have more than 15 million individual and institutional customers in the United States and in more than 30 foreign countries.
I. Procedural History
On February 10, 1998, Prudential publicly announced its intent to seek passage of state legislation to enable it to demutualize. On July 1, 1998, N.J.S.A. 17:17C-1 et seq. became effective. This act provides for and sets forth the requirements by which a mutual insurer authorized to transact the business of life insurance in this State may reorganize as a stock insurer. N.J.S.A. 17:17C-3 sets forth the required contents of a plan of reorganization. N.J.S.A. 17:17C-4 sets forth the required contents of the application and the standards for the approval of the plan of reorganization and permission to reorganize as a stock insurer, after a public hearing on the application. N.J.S.A. 17:17C-5 sets forth specific requirements for the approval of a plan of reorganization by the mutual insurerís qualified voters.
On October 25, 1999, Prudential formally announced its intent to demutualize in a letter from Prudentialís Chief Executive Officer, Arthur F. Ryan, to former Commissioner Jaynee LaVecchia. Prudential provided notice by mail of its intent to demutualize to former policyholders eligible to reinstate their policies as required by N.J.S.A. 17: 17C-14 in November and December 1999 and in April and May 2000.
On July 1, 2000, Prudential funded on a preliminary basis closed blocks for certain dividend paying individual participating life insurance policies and annuity contracts issued in the United States and Canada.
On December 15, 2000, Prudentialís Board of Directors unanimously approved and adopted a Plan of Reorganization ("Plan"). The Board of Directors amended and restated the Plan on March 13, April 6 and April 25, 2001. The application for approval of the Plan of Reorganization was initially filed by Prudential with the Department of Banking and Insurance ("Department") on March 14, 2001 in accordance with N.J.S.A. 17:17C-4, and was supplemented on April 9, April 12, April 25, and April 27, 2001.
On March 5, 2001 the Department adopted N.J.A.C. 11:2-14, which sets forth the procedures for the conduct of voting by policyholders on a plan of reorganization of a domestic mutual life insurer.
On April 27, 2001, the Department notified Prudential that the application was complete and that the forms of notice required to be filed in accordance with N.J.S.A. 17:17C-4a(7) were adequate and could be provided to policyholders.
From May 4, 2001 through May 31, 2001, Prudential mailed out information to approximately 10 million policyholders that included the Plan, a two-part policyholder information booklet ("PIB"), which provided notice of the public hearing and policyholdersí meeting, a voting guide, personalized reply cards and other related information. In addition, a group guide was sent to certain group policyholders and customized materials were sent to certain persons who filed claims under the alternative dispute resolution process provided for in the Stipulation of Settlement dated October 28, 1996 and amended on February 22, 1997 in In re: The Prudential Insurance Company of America Sales Practice Litigation, MDL Docket No. 10610, ("ADR claimants" or "ADR") and those former Canadian policyholders whose policies were sold to London Life Insurance Company ("London Life"). Copies of the Plan were available to the public at the Departmentís offices and from three document rooms staffed by Prudential in Trenton, Millville and Newark, New Jersey. This information was also posted on the Department's and Prudential's websites.
Notice of the date, time, place and purpose of the public hearing was published in various newspapers on June 6, 7, 13, 27 and 28, 2001 and on July 11 and 12, 2001. The specific newspapers in which notice of the hearing was published are: the Wall Street Journal (June 6 and 27, 2001 and July 12, 2001); USA Today (June 7 and 28, 2001 and July 11, 2001); the Newark Star Ledger, The Press of Atlantic City, Ocean County Observer, Philadelphia Inquirer, Asbury Park Press, Home News Tribune, The Courier News and Daily Record (June 13, 2001).
Policyholders voted on the Plan by mailing the paper ballot contained in the reply cards, by interactive voice response telephone, by Internet and by casting the paper ballot at an in-person policyholder meeting held on July 31, 2001. Prudential sent vote reminder postcards to all policyholders who had not voted prior to the close of the vote. The vote closed as of 4:00 p.m. eastern daylight time on July 31, 2001.
Prudential received private letter rulings from the Internal Revenue Service dated April 26, June 12 and June 29, 2000. The April 26, 2000 ruling was supplemented by the Internal Revenue Service on September 28, 2001. These rulings stated, among other things, that policyholders will not recognize gains or losses for federal income tax purposes upon receipt of Prudential Financial, Inc. ("PFI") common stock in the demutualization; that the basis of the PFI common stock received by policyholders will be zero; that the holding period of the PFI common stock received by policyholders will include the period during which the policy or contract giving rise to the demutualization consideration was in force; policyholders will recognize gains in the amount of cash received in the demutualization; receipt of policy credits credited to tax qualified policies as demutualization compensation will not be taxable unless and until the amounts are paid out under the policies and will not adversely affect the tax-favored status of the policies; and the conversion of Prudential from a mutual to a stock life insurance company will constitute a tax-free reorganization under the Internal Revenue Code. PFI is a newly formed holding company that will be the ultimate parent of Prudential and its current subsidiaries. An intermediate holding company, Prudential Holdings, LLC ("Prudential Holdings" or "IHC"), will be wholly owned by PFI and will be the immediate parent of Prudential.
Prudential received two no-action letters from the Securities and Exchange Commission on April 6, 2001 stating, among other things, that the exchange of PFI common stock for membership interests in Prudential is exempt from registration under Section 3(a)(10) of the Securities Act of 1933; the PFI stock issued to eligible policyholders will not be "restricted securities" within the meaning of Rule 144(a)(3) under the Securities Act; eligible policyholders who are not affiliates of PFI or Prudential at the time the Plan was submitted for approval of the policyholders may resell the PFI stock without regard to Rules 144 or 145(c) or (d); the issuance of PFI stock in the demutualization need not be integrated with the Initial Public Offering ("IPO") or with issuance of securities under the stock option plan; and the shares purchased and sold under the commission-free sales and purchases program need not be registered under Section 5 of the Securities Act of 1933.
Prudential requested an administrative prohibited transaction exemption from the United States Department of Labor on March 29, 2001 with respect to the receipt of demutualization compensation by employee benefit plans or individual retirement account/annuities for which Prudential may be considered a "party in interest" under the Employee Retirement Income Security Act of 1974 ("ERISA") or a "disqualified person" under the Internal Revenue Code of 1986. On September 27, 2001 the United States Department of Labor published a Notice of Proposed Exemption in the Federal Register summarizing the proposed exemption and requesting the submission of comments by December 26, 2001. See 66 Fed. Reg. 49,408.
Prudential has made several filings under the insurance holding company laws of the states in which it and its United States insurance subsidiaries are domiciled, including New Jersey. Prudential has sought exemptions in those states from state insurance holding company laws relating to the acquisition of control of domestic insurers due to the creation of the new intermediate holding company, Prudential Holdings, and the new ultimate parent, PFI. Prudential has filed for approval of extraordinary dividends in various states with respect to the destacking of several of its subsidiaries. See discussion on pp. 28-29, infra. Prudentialís filing with New Jersey with respect to the destacking extraordinary dividend was made on June 21, 2001 and supplemented on August 3, 2001 and October 2, 2001. Prudential filed for approval of an additional extraordinary cash dividend with New Jersey on June 21, 2001. Prudential withdrew its request for approval of this extraordinary dividend by letter dated October 12, 2001. Prudential has also sought approval of new agreements with affiliates and for treatment of promissory notes from PFI to Prudential as admitted assets for statutory accounting purposes.
The Department asked Prudential for additional information with respect to the Plan on June 6, 18 and 19, 2001. Prudential responded to these requests on July 6 and 11 and August 3 and 20, 2001.
In accordance with N.J.S.A. 17:17C-4d, a public hearing was held on July 17 and 18, 2001 to receive comments and information for the purpose of aiding the Commissioner in making a decision on the Plan. The public hearing was held at the War Memorial, 200 Barrack and West Lafayette Streets, Trenton, New Jersey. At the hearing, the following eight representatives of Prudential made a presentation regarding the proposed Plan.
1. Arthur F. Ryan, Chairman and Chief Executive Officer and President;
2. John Liftin, Senior Vice President & General Counsel;
3. Helen Galt, Company Actuary;
4. Daniel McCarthy, Principal of Milliman, USA;
5. C. Edward Chaplin, Senior Vice President & Treasurer;
6. William Cruger, Managing Director of J.P. Morgan Securities;
7. Priscilla Myers, Senior Vice President; and
8. Mark Grier, Executive Vice President.
In addition, the following 21 interested persons provided comments at the hearing, and the Commissioner and representatives of the Department questioned the representatives of Prudential as to certain aspects of the Plan.
1. Howard LeVine;
2. Daniel F. Case;
3. Michele Bidick-Ziemba
4. Michael Sondow;
5. Charles B. Dupree;
6. Joan A. Truman-Smith;
7. William Riccard;
8. Barbara VanKerkhove;
9. Anita Kartalopoulos;
10. Donald E. Casey;
11. Michael Weaver;
12. Deborah Goldberg;
13. Leila Amirhamzeh;
14. Jeff Williams;
15. Lisa Smith;
16. Bridgette Devane;
17. Robinson Chance;
18. Thomas B. Tierney;
19. Raymond W. Miller, Jr.;
20. James J. Cuningham; and
21. Joseph Ciocca.
The Department also received 121 written comments on the Plan. The deadline for the submission of public comments was August 17, 2001.
On August 1, 2001 Prudential submitted a certification of the results of the policyholder vote. The certification states that a total of 4,042,434 policyholders voted on the Plan: 3,710,447 in favor of the Plan and 331,987 against the Plan.
On August 15, 2001 the Department received a fairness opinion from its investment banking consultant, Fox-Pitt, Kelton Inc. ("Fox-Pitt"). On August 27, 2001, the Department received an actuarial opinion on the methodology and assumptions used to allocate total allocable shares among eligible policyholders and the methodology and assumptions used to determine the assets allocated to the United States and Canadian closed blocks from its actuarial consultant, Charles Carroll of Ernst & Young LLP. Finally, the Department received an agreed upon procedures report with respect to Prudentialís financial condition from its auditing and accounting consultant, Arthur Andersen LLP, on August 28, 2001.
On August 20, 2001 Prudential submitted for the Commissionerís approval a modification of the Plan to correct an error in Appendix A: Details of Destacking, Schedule 3.3(a). The correction revised item 1.b(5) to remove "Prudential International Investments Corp." and replace it with "The Prudential Life Insurance Company of Korea, Ltd." This request was approved on September 4, 2001.
The record closed on August 31, 2001. On September 27, 2001 the record was supplemented by a submission from Prudential addressing a proposed public offering of equity security units and a proposed private placement of common stock. On October 1, 2001 Prudential submitted an amendment to the business plan portion of its application to demutualize to address the anticipated impact on the company of the terrorist attacks of September 11, 2001. On October 4, 2001 Prudential supplemented its submission number 33 to include a supplemental ruling from the Internal Revenue Service dated September 28, 2001. A list of the items in the public record is attached to this decision and order.
II. Plan of Reorganization
Prudential asserts that since its formation, it has grown from a company primarily focused on selling life insurance to one of the largest financial services institutions in the United States, providing insurance, investment management and other financial products and services. In light of the consolidation occurring in the global financial services market, increased competition from companies outside the United States and from non-insurance companies, changes in distribution channels for financial services products and the reorganization into stock companies of many of its competitors, the Board of Directors of Prudential reexamined its existing corporate structure and concluded that it should demutualize for the following reasons:
1. Demutualization will enable the company to compete more effectively in the changing global financial services industry;
2. Demutualization will result in the distribution of the total value of the company to eligible policyholders pursuant to the Plan, thus affording eligible policyholders the opportunity to realize economic value from their membership interest or ownership interest, in a way and form that otherwise generally would not be available to them;
3. As a stock company, Prudential will have the ability to grow by ensuring access to capital which can fund the development of new products, services and sales channels and will have acquisition capital as well as acquisition currency;
4. As a stock company, Prudential can use stock-based compensation programs to recruit and retain high quality employees and align their long-term interest with shareholdersí interests; and
5. Demutualization will impose the discipline of being a publicly traded company on Prudential, such as providing periodic reports of its financial performance to the financial markets and being compared with similar institutions by financial analysts.
Before deciding to pursue demutualization, the Board of Directors and management considered whether to maintain a mutual company structure, whether to form a mutual holding company and whether to sell certain subsidiaries. The Board rejected maintaining a mutual structure because it would not permit distribution of the total value of the company to policyholders and would result in continued restriction of the companyís ability to grow in the future. A mutual holding company structure was rejected for similar reasons. Finally, sale of subsidiaries was rejected because it would not result in distribution of the value of the company to policyholders, might require divestiture of businesses important to the companyís future, and is an inefficient means to raise capital. The Board therefore authorized management on February 10, 1998 to seek enabling state legislation and to begin to develop a plan to demutualize. The company assembled a team of advisors to develop a plan including the actuarial firm of Milliman USA ("Milliman"); the investment banking firms of J.P. Morgan Securities Inc. ("JP Morgan") and Goldman, Sachs & Co. ("Goldman Sachs"); the accounting and auditing firm of PriceWaterhouseCoopers; and the law firms of LeBoeuf, Lamb, Greene & MacRae, LLP, McDermott, Will & Emery, Groom Law Group, and Sullivan & Cromwell. Milliman and JP Morgan have provided opinions to support the Plan as required by N.J.S.A. 17: 17C-3d(4) and N.J.S.A. 17: 17C-4a(2) and (5). Pursuant to N.J.S.A. 17:17C-4g, the Commissioner has retained outside consultants to assist him in the review of Prudential's Plan. These consultants include Ernst & Young LLP for actuarial services; Fox-Pitt, Kelton Inc. and The Townsend & Schupp Company for investment banking services; Arthur Andersen, LLP for accounting and auditing services; Buck Consultants, Inc. for employee benefit services and Saul Ewing LLP for legal services.
Prudentialís Plan acknowledges that policyholders of a mutual insurance company are the owners of the company. The Plan refers to the policyholdersí ownership rights as "membership interests" which include the right, if any, to vote at annual and special meetings and the right, if any, to share in the distribution of the residual value of the company upon dissolution. The Plan provides that eligible policyholders will receive shares of common stock of PFI, cash, or policy credits upon the extinguishment of their membership interests in Prudential. After demutualization, policyholders who become stockholders of PFI and all other PFI stockholders will have the right to vote at annual and special meetings. Following demutualization, PFI, as the indirect owner of 100% of the common stock of Prudential, will have the ultimate right to the residual value of Prudential upon dissolution.
Eligible policyholders are generally those policyholders who owned one or more insurance policies or annuity contracts issued by Prudential that were in force on December 15, 2000. The Plan deems some policyholders and categories of policies eligible even if the above criteria are not satisfied. The deemed eligible class includes certain transferred Canadian policyholders and certain former Prudential HealthCare policyholders; certain ADR claimants; policyholders with policies issued in the United States by Pruco Life Insurance Company, Pruco Life Insurance Company of New Jersey (together "Pruco Life") and Prudential Select Life Insurance Company of America (together with Pruco Life, the "designated subsidiaries"); and participating employers or individuals participating in a group under group insurance policies and annuity contracts issued to trusts for which Prudential is the settlor. The Plan provides that policyholders will retain their policies following demutualization, and that demutualization will not adversely change premiums or benefits, cash values, eligibility for policy dividends or any other guarantees or obligations of Prudential to policyholders pursuant to a policy.
Each eligible policyholder will receive compensation based on an allocation of a number of shares of PFI common stock. Each eligible policyholder will be allocated a basic fixed component of eight shares regardless of the number of eligible policies owned or the value of such policies. Moreover, each eligible policyholder, regardless of whether his or her policy is nominally classified as participating or nonparticipating or is silent with respect to participation, will be allocated a basic variable component based on estimates of the historical and projected future contributions of the policyholderís eligible policies to the surplus of Prudential. Those eligible policyholders who receive all of their compensation in the form of cash or policy credits or both will be allocated an additional fixed component and an additional variable component of approximately 10% of the shares otherwise allocated, subject to a minimum of two additional shares, which recognizes the value of the savings in shareholder servicing costs that otherwise would have been incurred if these eligible policyholders received stock. In addition, the compensation of eligible policyholders who receive consideration in the form of cash or policy credits may be increased pursuant to a "top-up" adjustment. The top-up adjustment provides that if the average of the closing prices of PFI common stock during the first 20 days of trading exceeds 110% of the IPO price, the amount of that excess, not to exceed 10% of the IPO price, will be added to the IPO price in determining the cash equivalent of the shares to be converted to cash or policy credits. This adjustment reflects additional value from any short-term increase in the stock price above the 110% threshold and subject to the 10% cap that would not otherwise be shared by eligible policyholders that receive cash or policy credits.
The Plan provides that compensation will be in the form of shares of PFI stock, cash or policy credits. In all but one case (discussed below), the form of compensation is not at the option of the policyholder. Stock is the general form of compensation. Cash will be provided to, among others, owners of policies denominated in Canadian dollars and policyholders not resident in the United States. Policy credits will be provided with respect to policies held as part of certain plans for tax reasons.
The Plan provides that if a policyholder is allocated a number of shares equal to or less than a cut-off number of 50, or a smaller number which may be set by the Board at or before the effective date (i.e., the IPO date), as his or her basic fixed and basic variable components and is not required to receive policy credits or cash, the policyholder will be permitted to elect to receive shares of PFI common stock in lieu of cash. Policyholders who do not elect to receive stock will receive their compensation in the form of cash unless the number of shares they are allocated as their basic fixed and basic variable components is greater than the cut-off number set by the Board at or before the effective date. The purpose of this cash default feature is to reduce the size of PFIís shareholder base so that shareholder-servicing costs can be contained and so that it is more feasible to obtain a shareholder quorum.
The Plan utilizes a mechanism known as a closed block to provide for the reasonable dividend expectation of policyholders who own certain dividend paying individual participating life insurance policies and annuity contracts. The purpose of the closed block mechanism is to allocate sufficient funds so that the year 2000 dividend scales in effect on December 15, 2000 could be continued if the experience underlying such scales continues, as well as to provide for appropriate adjustments in the scale if the experience changes. Two closed blocks have been established by Prudential, one for United States business and one for Canadian business. The amount of assets allocated to the closed blocks was calculated to be that amount that produces cash flows, which when aggregated with future premiums from closed block policies and investment income from closed block assets, are expected to be reasonably sufficient to enable the closed blocks to pay guaranteed benefits, certain expenses and taxes, and to maintain the dividend scales payable in 2000, if the experience underlying such scales continues. The closed blocks were provisionally funded and began operations on July 1, 2000. The amount of funding was subsequently adjusted to reflect, among other things, policies of the types included in the closed blocks issued after the funding date. The United States closed block was funded with $48.7 billion of assets while the Canadian closed block was funded with C$176.2 million of assets as of July 1, 2000.
The Plan provides that an IPO must occur in order for the demutualization to become effective. The IPO will establish a market price for shares of PFI common stock that will be used to determine the value distributed in the form of cash or policy credits.
The Plan indicates that Prudential intends to effectuate three significant changes to the organizational and capital structure at or within 30 days of its demutualization. The goal of these changes is to increase the value of the demutualization compensation distributed to eligible policyholders and to increase its financial flexibility. However, these three changes are not prerequisites to the demutualization and the demutualization can occur if any or all of the changes are not effectuated. These changes are: (1) destacking of subsidiaries, (2) payment of an additional extraordinary dividend, and (3) issuance of Class B stock and of intermediate holding company debt. However, on October 12, 2001 Prudential withdrew its request for approval of an additional extraordinary dividend and thus item (2) above will not occur at this time.
The destacking, discussed in order No. A01-154 issued simultaneously herewith, refers to the transfer of certain subsidiaries, related assets and non-insurance liabilities from Prudential to PFI. The principal subsidiaries to be destacked include: (1) property and casualty insurance companies; (2) principal securities brokerage companies; (3) international insurance companies; (4) principal asset management operations; and (5) international securities and investments, domestic banking, residential real estate brokerage franchise and relocation service operations. These subsidiaries were valued at approximately $3.829 billion as of December 31, 2000 on the companyís 2000 annual statement and approximately $4.216 billion on the company's June 30, 2001 quarterly statement.
In addition, the Plan includes a proposal to pay an additional extraordinary dividend to PFI of up to $2.5 billion in order to increase PFIís cash liquidity and enhance the value of its common stock at the time of the IPO. However, Prudential withdrew its request for approval of this additional extraordinary dividend by letter dated October 12, 2001.
Finally, the Plan proposes the sale of 2.0 million shares of Class B stock expected to reflect the performance of: (1) the assets and liabilities of the closed block; (2) surplus and related assets and liabilities held outside the closed block that support the closed block policies; and (3) specified related assets and liabilities in Prudential Holdings and PFI (items (1), (2), and (3) collectively being referred to as the "closed block business"). Prudential also plans to sell debt securities of Prudential Holdings whose interest and principal are expected to be paid out of the assets of the closed block business, but not out of the assets used to fund the closed block.
The Plan provides that stock and stock options will be used as part of the total employee compensation package after demutualization. Current members of the Board of Directors are precluded from participating in the stock option plan until one year after the effective date of the Plan. Senior officers of Prudential or their equivalents within an affiliated company are also precluded from receiving any stock options for one year from the effective date. Officers below the senior level and their equivalents within affiliated companies are precluded from receiving any grant of stock options for 183 days after the effective date. Other employees are not subject to any time restriction and may participate in an associates grant program that may grant options of up to 2% of the shares notionally allocable to eligible policyholders in the demutualization. Options to officers are limited to 5% of the shares notionally allocable to eligible policyholders in the demutualization under the Plan.
B. Eligible Policyholders
All eligible policyholders will receive demutualization compensation. According to the Plan, an eligible policyholder is a person who was, or was deemed for purposes of the Plan to be, the owner of one or more eligible policies that were in force, or deemed to be in force, on December 15, 2000 (the Board adoption date). In order to be an eligible policy, a policy must satisfy the following requirements regarding the issuer of the policy, the type of policy, and the in force requirement:
1. Issuer of the policy. The policy must have been issued by one of the following entities:
a. Prudential (including its Canadian branch);
b. The U.S. operations of a designated subsidiary;
c. Prudential and The National Life Assurance Company of Canada ("National Life") jointly, pursuant to a reinsurance agreement;
d. Prudential's Canadian branch, then transferred by Prudential to London Life in 1996, and the policy either:
e. Prudential, then transferred through coinsurance to an Aetna, Inc. company and succeeded by an Aetna company health insurance policy following notice that the health insurance policy is being cancelled or non-renewed by Prudential; or
f. Some other carrier, but assumed by Prudential or a designated subsidiary through an assumption reinsurance agreement.
2. Type of Policy. The policy must be one of the following:
a. An individual or group life insurance policy (including a pure endowment contract), annuity contract or health insurance policy;
b. A funding agreement;
c. A guaranteed investment contract;
d. A supplementary contract; provided, however, that any supplementary contract issued to effect the annuitization of an individual deferred annuity contract is treated with such deferred annuity contract as one policy; or
e. A certificate or other evidence of interest in a group insurance policy or annuity contract issued to a trust established by Prudential.
3. In force requirement. The policy must have been, or be deemed to have been, in force as of December 15, 2000 with Prudential (or, as applicable, a designated subsidiary, London Life, National Life, Great-West or an Aetna company). The Plan provides specific rules for determining whether a policy is in force. Furthermore, in the case of a transferred Canadian policy, the policy is deemed to be in force with the Company if it meets certain conditions to be in force with London Life or Great- West. In the case of a health insurance policy originally issued by Prudential, but replaced with an Aetna health insurance policy following notice of cancellation or nonrenewal by Prudential ("rewritten health policies"), the policy is deemed to be in force if it meets certain conditions to be in force with Aetna. In the case of a policy that is issued, reinstated or repurchased in accordance with the ADR Memorandum (Exhibit E to the Plan), the policy is deemed to be in force if it meets specific conditions of the ADR Memorandum.
Moreover, if Prudential or a designated subsidiary had ceded a policy that met the above conditions of eligibility to another company by reinsuring it with the company under a contract of indemnity reinsurance, the reinsurance would not change the eligibility of that policy.
Ownership of an eligible policy (meeting the foregoing conditions as to type, issuer, and in force status) gives the owner the right to receive demutualization compensation. The Plan contains rules for determining the identity of the owner of a policy. For an individual policy, the owner is the person insured under an individual insurance policy or the person to whom the benefit is payable in the case of an individual annuity contract, unless a different person is designated as the owner. In the case of group insurance, the general rule is that the owner of a policy is the person specified as the contract holder or policyholder. Situations where the owner is determined by different rules include: (1) absolute assignments of individual policies to other persons or entities; (2) joint ownership; and (3) individual retirement accounts where Prudential Securities Incorporated, or some other entity affiliated with Prudential serves nominally as custodian.
Under the Plan, the following policies are specified as ineligible, even if they meet the foregoing conditions to be an eligible policy:
1. A policy purchased or reinstated on or after February 10, 1998 (except policies repurchased or reinstated as a form of relief under ADR) by certain officers, directors and employees of Prudential or Prudential affiliates (and certain relatives of such officers, directors and employees);
2. A structured settlement that is owned by a Prudential affiliate; and
3. A policy where Prudential or a Prudential affiliate is both the owner of record and the beneficial owner (policies held by or on behalf of employee benefit plans of Prudential and Prudential affiliates that are subject to ERISA and individual retirement annuity contracts where Prudential or a Prudential affiliate serves as a custodian are not included in this group).
Item 3 above describes the general rule in the Plan that policies where Prudential or an affiliate is both the owner of record and the beneficial owner will not be considered eligible policies for purposes of the Plan. Accordingly, neither Prudential nor an affiliate will receive demutualization compensation for owning these policies. However, Prudential or an affiliate will receive demutualization compensation with respect to the following policies that it owned and that were in force on December 15, 2000:
1. Policies held by or on behalf of employee benefit plans of Prudential or an affiliate that are subject to ERISA; and
2. Individual retirement annuity contracts where Prudential or an affiliate serves as a custodian.
With respect to group business, the owner of a group insurance policy, group annuity contract, guaranteed investment contract or funding agreement is the person or entity identified in the applicable records as the policyholder or contract holder. The holder of a certificate or other evidence of interest under a group policy will not generally receive demutualization compensation. However, if the group policy was issued to a trust established by Prudential, Prudential will consider each participating employer or, if there were no participating employers, each individual participating in the group policy, to be an owner of a separate policy for purposes of allocating compensation.
Owners of some policies associated with ADR claims repurchased or reinstated after December 15, 2000 will be deemed eligible policyholders. In 1995, some policyholders and former policyholders asserted claims against Prudential in a class action lawsuit. As part of the settlement of that class action, a claims resolution, or ADR process, was instituted whereby claims were evaluated on an individual basis and relief was awarded accordingly. Pursuant to commitments Prudential made to these ADR claimants, it will provide ADR claimants who rescinded an in force policy, or who gave up their right to acquire a policy, as part of the form of ADR relief, an option to change their form of ADR relief and repurchase their policy or otherwise put it back in force. The Plan deems to be eligible policyholders those ADR claimants who have completed all requirements to repurchase their policies within 45 days of the date of the letter forwarded to them by Prudential specifying those requirements. In addition, any policy issued, repurchased or reinstated as a result of an initial ADR relief choice implemented after December 15, 2000, but prior to the effective date of the Plan, will be deemed to have been in force as of December 15, 2000 and the ADR claimant will be eligible to receive compensation for such policy.
The foregoing rules outline eligibility to receive demutualization compensation. The rules for eligibility to vote differ in the following respects. A policyholder must be at least 18 years of age to vote and must have owned his or her policy for at least one year. Policyholders eligible to vote include only those with contracts issued by Prudential, not those issued by the designated subsidiaries or transferred to London Life, Great-West, or Aetna.
C. Demutualization Compensation
Demutualization compensation is provided to eligible policyholders in different amounts and in different forms. The amount of compensation is expressed as a number of shares, regardless of the form of compensation. Depending on the number of shares and other considerations, compensation may take the form of shares of stock, cash or policy credits in an amount based on, among other things, the number of those shares.
The Plan provides for two components of the amount of compensation for eligible policyholders: (1) a fixed component; and (2) a variable component. According to the Plan, each of these components may consist of two elements: (1) a basic element; and (2) for eligible policyholders receiving no stock, an additional element.
The basic fixed component is equal to eight shares of PFI stock per policyholder. Therefore, each eligible policyholder will be allocated a minimum of eight shares. Each eligible policyholder will be allocated only one basic fixed component, regardless of the number of eligible policies the eligible policyholder owns or their value. In the aggregate, the basic fixed component represents approximately 14.4 percent of the total basic fixed and basic variable compensation being distributed to all eligible policyholders in the demutualization.
In addition, each eligible policyholder will be allocated a basic variable component. The total shares to be distributed as basic variable components will be allocated based on estimates of the relative contributions of the eligible policies to Prudential's surplus. This methodology is referred to as the "contribution to surplus" methodology. The contribution to surplus methodology used in the Plan reflects both estimated past and projected future contributions ("historic plus" methodology). The estimates of the relative contributions of the eligible policies to Prudential's surplus for each eligible policy may take into account the type of eligible policy, when it was issued, the policy size, and premium, among other factors. Estimates of the contribution to surplus of each policy are obtained by estimating the annual contribution to surplus in each past and future year, and then adjusting for interest. The annual contribution to surplus can be viewed as the excess of premiums, investment income and capital gains over benefits, dividends, commissions, expenses and taxes. Estimates of these amounts for each policy are based upon analysis of the actual or expected experience of the company and characteristics of the policy. In some cases, particularly individual life, a modeling approach is used. In a modeling approach, contribution to surplus is calculated for a policy with particular characteristics, and then regression techniques are used to obtain the contribution to surplus for all policies of the same class.
If an eligible policy's expected contribution to Prudential's surplus over the expected lifetime of the eligible policy is negative or zero, then the basic variable component for such a policy will equal zero. If all eligible policies owned by a particular policyholder have a zero basic variable component, the policyholder will be allocated only a basic fixed component (unless also allocated an additional fixed component as described below). In determining the expected contribution of a policy, the Plan uses the concept of "financial management unit", which is a group of coverages managed together from a financial point of view. A financial management unit may combine two or more policies, or a single policy may contain more than one financial management unit.
In most cases, the Plan provides that the estimates of the relative contributions of an eligible policy to Prudential's surplus that will be taken into account for purposes of allocating the basic variable component will include only contributions made or expected to be made by that policy. However, in some cases, the contributions to surplus for an existing policy will include all or part of the financial experience of a prior policy that the existing policy replaced. Prudential states that it examined its financial management practices to determine when a current policy should be viewed as a continuation of a prior policy for the purposes of determining contributions to surplus. Generally, if important financial elements of the prior policy were carried over to the new replacement policy, the past contributions to surplus under the prior policy would be added to those of the new policy.
For purposes of allocating a basic variable component, there is no distinction between participating and nonparticipating policies, either nominally (whether the contract is designated participating or nonparticipating) or in fact (whether or not the contract receives or is designated to receive dividends). Prudential states that allocating a basic variable component of compensation to eligible policyholders with nominally nonparticipating policies (including nonparticipating policies of designated subsidiaries) results in aggregate compensation to eligible policyholders with nominally participating policies being reduced by approximately 11.8 percent.
Eligible policyholders who will receive demutualization compensation in the form of cash or policy credits or both, and no stock (as described below), will be allocated a single additional fixed component equal to two shares of PFI stock. If the total basic fixed and variable component exceeds 25 shares, they will be allocated an additional variable component equal to approximately 10% of that total, less two shares.
In addition, these same eligible policyholders who receive any of their compensation in the form of cash or policy credits may have the value of their shares adjusted by the top-up as described below. Eligible policyholders who receive all or part of their compensation in the form of stock will not receive any additional fixed or variable components, nor will they be eligible for the top-up.
The Plan provides for three types of compensation: stock; cash; or policy credits. However, all forms of compensation are not available to all eligible policyholders. Generally, eligible policyholders will receive shares of PFI stock equal to the total of a policyholder's basic fixed and basic variable component, and will not have the option of receiving other forms of compensation.
Compensation will be required to be in the form of cash with respect to a policy if the policyholder is not required by the Plan to receive policy credits with respect to that policy and:
1. The policyholder's mailing address is outside the United States as of the effective date; or
2. Prudential does not have a valid address for the policyholder as of the effective date; or
3. The policy is subject to a judgment lien, creditor lien or bankruptcy proceeding as of the effective date; or
4. The policy is denominated in Canadian dollars.
In addition, policyholders who are not required to receive cash or policy credits with respect to a policy, and for whom the total number of shares to be received is less than a cut-off number (of 50 shares or fewer) to be set by the Board of Directors, will receive cash unless such policyholder affirmatively elected to receive shares by the deadline in the Plan. This group of policyholders is the only group for which the Plan provides an option as to the form of compensation.
Some policyholders will be required to accept policy credits, which consist of dividend accumulations, dividend additions, increases in account value or other policy related benefits. A policyholder will receive policy credits with respect to a policy if the policy is an individual retirement annuity issued or held in association with certain tax-qualified plans or certain tax-qualified individual retirement annuities and tax deferred annuities or policies related to such annuities. These policyholders must receive policy credits under Plan in order to protect the policy's tax status. Policyholders will not have to pay any money or give up their policies to receive these policy credits. The form of the policy credits depends on the form of the contract.
A policyholder with multiple policies may, under certain circumstances, receive compensation in two or more different forms. The Plan outlines the method of allocation of this compensation.
The amount of cash or policy credits will be determined by valuing the stock allocated at the IPO price to obtain a cash equivalent. In the case of policy credits, this cash equivalent must be further converted to policy credits. However, as noted previously, the Plan also contains a top-up provision. The top-up applies to any compensation in the form of cash or policy credits. The top-up is an amount in addition to the IPO price for shares of PFI stock. If the average of the closing prices of PFI stock on the primary exchange where it is listed during the first 20 days of trading (the top-up period) exceeds 110% of the IPO price, the amount of that excess, not to exceed 10% of the IPO price, will be added to the IPO price in determining the cash equivalent of the shares to be converted to cash or policy credits.
D. Financial Transactions
The Plan provides that on the effective date, PFI will sell shares of stock in an IPO for cash. The Plan will become effective the date the IPO is completed. The Plan provides that the IPO must be completed within 12 months after the Commissioner approves the Plan, unless the Commissioner agrees to extend this 12 month period.
The Plan provides that Prudential will require the managing underwriters for the IPO to conduct the offering process in a manner that is consistent with customary practices for similar offerings, and on or prior to the effective date, Prudential shall have received an opinion from a qualified, nationally recognized investment banker that the conduct of the IPO was done in such a manner. A copy of the opinion will be delivered to the Commissioner.
In addition, pursuant to the Plan, the Commissioner and his financial advisors will be given access to the IPO process and information that leads to the pricing of the common stock in the IPO, and the Commissioner must find that the terms of the IPO promote the best interests of eligible policyholders.
2. Class B Stock and IHC Debt
The Plan provides that, in addition to the IPO, PFI and Prudential Holdings, as applicable, may sell, in one or more private offerings, shares of Class B stock of PFI and/or debt securities of Prudential Holdings, in accordance with the terms and conditions set forth in Schedule 3.3(c)(i) to the Plan. The IHC debt securities may be secured by a pledge of shares of common stock of Prudential held by Prudential Holdings. The maximum aggregate principal amount of any offering of IHC debt securities will be limited to an amount such that the shares of common stock of Prudential pledged to secure such IHC debt securities do not exceed 49% of the number of issued and outstanding shares of common stock of Prudential.
The Class B stock will be designed to reflect the performance of the closed block business. If the Class B stock is issued, then the common stock is expected to reflect the performance of the financial services businesses. The closed block business (which is not the same as the closed block) will consist of:
The financial services businesses will consist of all assets and liabilities of PFI and its subsidiaries not included in the closed block business. PFI will provide, as permitted, separate reporting of the financial performance of the financial services businesses and the closed block business and will allocate assets and liabilities and earnings between them. However, this separation will be for reporting purposes only, and will not constitute a legal separation of the two lines of the financial services businesses and closed block business.
According to the Plan, PFI may offer for sale such number of shares of Class B stock at such price and on such terms as PFI shall determine are reasonably necessary to effectuate their sale. The net proceeds from the sale of the Class B stock will be used for the general corporate purposes of PFI. The holders of the common stock and the holders of the Class B stock, as common stock holders, will generally vote together on all matters as a single class and will have specified dividend and liquidation rights. The Class B stock may be exchangeable or convertible by PFI or the holders of the Class B stock into shares of common stock on such terms as are specified in the certificate of incorporation of PFI.
Prudential Holdings may offer the IHC debt securities in such amount, on such terms and with such covenants and conditions as Prudential Holdings shall determine are reasonably necessary to effectuate their sale, subject to the above limitations as to size.
3. Destacking Dividend
In connection with the proposed reorganization, Prudential intends to effect the destacking, which means the realignment of the ownership of certain subsidiaries, assets and non-insurance liabilities of Prudential. The completion of the destacking is not a condition to the effectiveness of the Plan. In addition to the approval by the Commissioner of the Plan, the destacking is subject to any separate approvals by the Commissioner under all other applicable requirements of New Jersey insurance law, including, but not limited to, N.J.S.A. 17:27A-4. The subsidiaries involved in the destacking will no longer be owned by Prudential. The destacking will be effected by means of the destacking extraordinary dividend by Prudential to PFI or to Prudential Holdings. The destacking extraordinary dividend will consist of the common stock of certain subsidiaries of Prudential and other assets and non-insurance liabilities of Prudential as specified in the Plan.
4. Additional Extraordinary Dividend
Prudential may, under the Plan, pay an additional extraordinary dividend, subject to the requirements of the New Jersey Insurance Holding Company's System Act, N.J.S.A. 17:27A-1 et seq., including the Commissioner's prior written approval. The fair market value of the additional extraordinary dividend may not exceed $2.5 billion. However, Prudential withdrew its request for approval of the additional extraordinary dividend by letter dated October 12, 2001.
5. Additional Capital Raising Transactions
Prudential may raise capital through additional transactions, including a private or public offering of debt, additional common stock, preferred stock or other equity securities of PFI or Prudential Holdings, subject to the separate approval of the Commissioner. In addition to the IPO, and the private placements of Class B stock and the IHC debt securities, PFI and Prudential Holdings may also raise funds for use in connection with the Plan prior to, on or within 30 days after the effective date through one or more of the following: (1) a private or public offering of debt, additional common stock of PFI, preferred stock or other equity securities of PFI or Prudential Holdings; options, warrants, purchase rights, subscription rights or other securities exchangeable for or convertible into any of these; or a combination of these items; or (2) bank borrowings. Prior notice of other capital raising transactions must be given to the Commissioner, and any sale by PFI or Prudential Holdings of preferred stock or other equity securities, or securities exchangeable for or convertible or exercisable into PFI stock must be subject to the specific approval of the Commissioner pursuant to the New Jersey demutualization law.
Prudential has applied to the Commissioner for permission, pursuant to this Plan provision, to raise additional capital through two transactions in addition to the IPO and the private sales of Class B stock and IHC debt. These two transactions are a potential private placement of common shares ("private placement") and the public sale of equity security units ("ESUs"). The total number of shares to be issued in connection with the IPO, and a potential private placement, and the share equivalent of the proceeds of the ESUs (gross proceeds divided by IPO price) is anticipated not to exceed the number of shares allocated to policyholders who receive compensation in the form of cash or policy credits.
The potential private placement would be a sale of shares of common stock to private investors in a transaction exempt from registration under federal securities law. The private placement would be completed at the same time the IPO closes, and the offering price per share would be no less than the price per share of common stock in the IPO.
The ESUs, which would be publicly sold at the same time as the closing of the IPO, would consist of, among other things, a combination of: (1) a contract to purchase shares of common stock on a specified date in 2004, and (2) an interest bearing capital security of a business trust organized and controlled by PFI. The number of shares to be purchased and the price of those shares depends on the IPO price, a reference price stated in the contract, and the average market price of the common stock near the specified exercise date.
E. Stock Options
On the effective date, the stock option plan will take effect. The stock option plan will consist of two components, the associates grant and the executive stock option program. Under the associates grant, a one-time grant of stock options in an amount to be determined by the Board will be made on the effective date to employees of Prudential and Prudential affiliates. Under the executive stock option program, annual grants of stock options in amounts to be determined by the Board of Directors of PFI will be made to executives and certain other selected employees of Prudential and Prudential affiliates. However, no such grant under the stock option plan may be made to any senior officer of Prudential earlier than the first anniversary of the effective date, and grants under the stock option plan may not be made to other officers of Prudential earlier than six months after the effective date. Stock options under both programs will become exercisable ratably over three years and will have a maximum term of ten years. The stock option plan will provide that, without the approval of the shareholders of PFI, the aggregate number of shares of common stock available to be issued pursuant to the stock option plan will not exceed, with respect to the associates grant, 2% of total allocable shares and, with respect to the executive stock option program, 5% of total allocable shares. The shares of common stock used for the stock option plan may be shares purchased in market transactions, other treasury shares or authorized but previously unissued shares.
No person who was a member of the Board prior to the effective date shall be eligible to receive any grants of stock options on the effective date or for one year thereafter under the stock option plan.
F. Corporate Governance
On the effective date, Prudential will become a stock life insurance company and become a wholly owned subsidiary of PFI. At the same time, the membership interests will be extinguished and shares of common stock, cash or policy credits will be provided to all eligible policyholders. PFI will contribute all the issued and outstanding shares of the capital stock of Prudential to Prudential Holdings in exchange for all of the issued and outstanding equity interests of Prudential Holdings. Thereafter, the shareholders of PFI will elect the members of the Board of Directors of PFI.
Upon the reorganization, Prudential will continue its corporate existence in the form of a stock life insurance company. The members of the Board of Directors of PFI, after the effective date, will be those individuals who were the members of the Board of Prudential immediately prior to the effective date. Each such member will continue to serve as a director of PFI until the end of his or her term.
PFI will be a New Jersey business corporation and its restated certificate of incorporation and bylaws will be in such form as described in the Plan. The authorized capital of PFI will be 1.51 billion shares of common stock, par value $.01 per share, and 10 million shares of preferred stock, par value $.01 per share.
The Board of Directors will be a classified board, divided into three classes, as nearly equal in number as possible, serving staggered three year terms. If holders of preferred stock are ever entitled to elect any directors, such directors will be in addition to the number fixed pursuant to the bylaws. Holders of common stock and Class B stock will vote together as a single class, except under certain circumstances.
A quorum for a shareholders meeting is established at any shareholders meeting if holders of 25% of the shares entitled to vote are present in person or by proxy. The certificate of incorporation provides for an increase in the quorum requirement for succeeding shareholders meetings based on the number of shares present or represented at a given shareholders meeting. Specifically, if at least 35% of the issued and outstanding shares of common stock are represented at a given meeting, the quorum for subsequent meetings will be 30%; if at least 45% are represented, the quorum will be 40%; if at least 55% are represented, the quorum will be 50%. When the holders of the Class B stock vote separately as a class, holders of a majority of such shares constitute a quorum.
In order to amend certain provisions in the certificate of incorporation relating to the structure of the Board of Directors, shareholders meetings and quorums, personal liability of directors and power to amend the certificate of incorporation and the bylaws, an affirmative vote of holders of at least 80% of the votes cast at a shareholders meeting (provided that the number of votes cast at such meeting is at least 50% of the total number of shares outstanding at that time) is required. Similar provisions in the bylaws may not be amended by shareholder action without either an affirmative vote of at least 80% of the votes cast (provided 50% of the total number of shares outstanding are present) or the approval of the Board of Directors. The Board of Directors may amend provisions in the certificate of incorporation relating to the Class B stock without the approval of holders of common stock.
A special meeting of shareholders may be called by the Chairman of the Board, the Chief Executive Officer, the President, the Board of Directors, or holders of at least 25% of the shares entitled to vote at a meeting. Shareholders wishing to propose business at an annual shareholders meeting must deliver timely notice thereof in proper written form to the Secretary of PFI. To be timely, the shareholder's notice must be delivered to or mailed and received at the principal executive offices of PFI not less than 120 days nor more than 150 days prior to the anniversary date of the immediately preceding annual shareholders meeting. To be in proper written form, a shareholder's notice must conform to certain requirements.
The bylaws provide that there will be at least 10, but not more than 24, directors. The bylaws further provide for the indemnification of directors and officers under certain conditions. PFI may also choose to indemnify employees and agents in certain situations.
G. Closed Blocks and Other Protections
The Plan provides for the reasonable dividend expectations of participating policyholders. Policies that are currently entitled to receive policy dividends in amounts declared by Prudentialís board of directors will continue to be entitled to receive policy dividends from Prudential on the same basis. In the case of individual policies and contracts where dividends are provided through an experience based dividend scale, reasonable dividend expectations will be protected through the establishment of closed blocks. The Plan uses two closed blocks, one for U.S. business and one for Canadian business.
The closed blocks will generally include traditional participating individual and joint whole life insurance policies, individual term life insurance policies, and individual retirement annuity contracts that are currently paying or are expected to pay policy dividends based on experience (or that currently pay no dividends only because they are in extended term insurance status), along with all supplementary benefits and riders attached to these policies. Certain classes of policies, however, will not be included in the closed block. No group policies will be included, regardless of whether they are currently paying or are expected to pay policy dividends.
The Plan provides that Prudential will set aside assets for the closed blocks. The amount of the assets set aside for the benefit of the closed blocks has been calculated so that the assets, together with the investment cash flows they produce and anticipated revenues from the closed block policies, are expected to be reasonably sufficient to provide for all guaranteed policy benefits and expenses and taxes charged to the closed block, as well as policy dividend payments according to the year 2000 dividend scales, if the experience underlying the current dividend scales continues. The Plan provides that the calculation of the amount of assets to be set aside to fund the closed blocks was based on a determination of the experience that underlies the current dividend scales. Since, for the business in the U.S. closed block, the current dividend scales have been essentially unchanged during the period 1997-2000, Prudential measured the experience underlying the current dividend scales by averaging the various components of experience over the four years, 1997 through 2000. For the Canadian closed block, the assumptions underlying the 2000 dividend scale were used.
The amount of assets used to fund the U.S. closed block was $48.7 billion as of July 1, 2000, after reflecting final inventories of policies in force as of that date and other factors. Prudential noted that because the closed block includes the policies issued up to the effective date of the Plan, and in some cases after the effective date, the funding amount of $48.7 billion will be adjusted appropriately to take into account closed block policies issued on or after July 1, 2000.
Prudential noted that under the demutualization law, it is required to obtain a certification of a qualified independent actuary with respect to the reasonableness and the sufficiency of the assets allocated to the closed blocks. Prudential received such opinion with respect to both the U.S. and the Canadian closed blocks. The demutualization law also requires a certification by a qualified independent actuary appointed by the Commissioner. The independent actuary retained by the Commissioner rendered an opinion that the assets allocated to the U.S. and Canadian closed blocks respectively, were reasonably sufficient to continue the 2000 dividend scales assuming the experience underlying those scales continues.
The Plan provides that the dividend scales for closed block policies will be appropriately adjusted in the future if the experience underlying those scales changes. The Plan also requires Prudential to provide the Commissioner each year with certain financial information relating to the closed block and to provide, every fifth year, a report of an independent actuary concerning the operations of the closed blocks.
The Plan provides arrangements to provide for the reasonable expectations of certain policies not included in the closed block with respect to their dividends and other non-guaranteed elements. For some policies, these provisions include continuation of a dividend scale or crediting of interest with respect to an index, subject to change only with the approval of the Commissioner. However, for some individual policies described as "Flexible Factor Policies" (which have premiums, interest credits, or charges that are non-guaranteed and may change based upon projected future experience) the Plan provides that such changes will be subject to notification to the Commissioner, and will require demonstration either that the profit factor in the policy is not being increased, or a justification if it is being increased. For some individual fixed and variable annuity contracts for which the crediting rate on the annuity is set periodically, Prudential is required to file with the Commissioner a formula for a base crediting rate, and additional information if credited rates fall below that base crediting rate. The latter filing must either demonstrate that the profit factor has not been increased or justify such an increase.
The Plan does not provide for explicit protection of the dividend expectations of policyholders of group insurance policies or group annuity contracts that provide dividends or experience refunds based upon actual experience.
III. Public Comments
Twenty-one individuals provided oral statements at the hearing on Prudentialís demutualization. In addition, 121 written comments were received from members of the public. These comments and Prudentialís responses are summarized by topic below.
A. Demutualization Generally
Some policyholders believe that Prudential should not pursue demutualization. They are concerned that their policy benefits could decrease or costs could rise as a result of demutualization. Some argue that the mutual structure is most beneficial to policyholders because it provides them with the right to govern the company. They feel that a stock company structure will create competing interests between shareholders and policyholders. Shareholders will be interested in increasing the stock price and shareholder dividends, as opposed to policyholders, who will be interested in keeping the cost of insurance low and in protecting policyholder benefits. Some policyholders are concerned that stock companies are less financially secure than mutual companies. Others are concerned that as a stock company, another company could acquire Prudential.
Prudential responds that its Board of Directors examined the issue of Prudential remaining a mutual company in light of the many changes occurring in the global financial services market. The Board of Directors determined that Prudential needs to become a publicly traded company to compete more effectively in the changing global financial services industry. Prudential states that the demutualization will allow it to distribute the total value of Prudential to eligible policyholders and that there will be no negative changes to premiums or benefits, cash values, eligibility for policy dividends or any of Prudentialís other guarantees or obligations under a Prudential policy or contract. Moreover, Prudential believes that both policyholders and shareholders will benefit from business opportunities that the demutualization will make possible because of increased access to the financial markets, enhanced financial flexibility, and the improved ability to attract and retain qualified employees. Numerous other stock life insurance companies have managed such competing interests, and Prudential believes that it will be able to do so also. Prudential notes that, initially, the majority of shareholders will be policyholders and that running PFI successfully for shareholders seems to necessitate running it successfully for policyholders also. Prudential notes that the demutualization law, and its charter and bylaws, have provisions that make an uninvited takeover more difficult.
B. Deemed Policyholders
Some individuals expressed concerns regarding the inclusion of policyholders of certain subsidiaries as eligible to receive demutualization compensation. Prudential believes that the policies which were deemed eligible under the Plan should be included in order for the Plan to be fair and equitable.
Prudential examined its operations and determined that in certain limited circumstances it would be fair and equitable to Prudential policyholders, and in the best interest of Prudential and its policyholders, to deem certain persons to be eligible for demutualization compensation. Prudential deemed owners of policies issued in the United States by Pruco Life to be eligible policyholders in order to address certain circumstances that exist with regard to such policies. Prudential concluded that policyholders of Pruco Life, unlike policyholders of other Prudential subsidiaries, could expect to be treated the same as Prudential policyholders in the demutualization because:
C. Allocation of Compensation
Numerous questions have been raised about the methodology used to allocate compensation among eligible policyholders. Many policyholders want access to the precise methodology, factors or data underlying the computation of their allocation. Others feel that their allocation was insufficient when compared to other policyholders or to what was received in other demutualizations. Some feel that the historic plus methodology is unfair to policyholders whose policies have been in force for a long time. Some certificate holders covered under group contracts questioned why they were not entitled to receive demutualization compensation. Finally, some policyholders question how the owner of an eligible policy was determined.
Prudential states that the principles used to allocate policyholder consideration are based upon actuarial standards of practice and are consistent with recent demutualizations in the United States. The overall objective was to achieve an allocation that is fair and equitable. Prudential and the Department each received an opinion from their independent actuarial consultant that the methodology and underlying assumptions for allocation of consideration among Prudentialís eligible policyholders are reasonable and appropriate.
Prudential notes that the demutualization law does not mandate use of a particular allocation methodology, only that the methods and assumptions be reasonable and appropriate. The historic plus methodology is consistent with relevant actuarial standards of practice and most of the prior United States life insurer demutualizations; it is permitted by the demutualization law; and, according to Prudential's advisors, it is consistent with how the marketplace would determine a value for Prudential as well as the ultimate economic value of each policy.
Prudential asserts that for group policies or contracts, the owner (and thus the person entitled to receive compensation) is generally the person or entity identified in Prudentialís records as the policyholder or contract holder. The holder of a certificate under a group policy is generally not entitled to receive compensation directly from Prudential. Most group policyholders are subject to state or federal laws governing their use of such assets for the benefit of plan participants. Prudential states that the law requires that consideration be paid to the owner of record on the adoption date, even if ownership changes subsequently.
D. Nonparticipating Policyholders
Some individuals expressed concerns regarding the inclusion of nonparticipating policyholders as eligible to receive a variable component of consideration, based on the contributions to surplus made by their nonparticipating policies.
Prudential responds that there is no distinction between the rights and interests in a mutual insurer of an owner of a policy denominated as "participating" and the owner of a policy denominated as "nonparticipating" or that is silent with respect to participation. The owners of all of these policies share the same voting rights and are given equal treatment in the event of the mutual insurerís liquidation. Furthermore, historic differences between products denominated "participating" and "nonparticipating" have become increasingly less meaningful. Prudential states that generally both participating and nonparticipating policies are priced to and do in fact make positive contributions to Prudential's surplus. Accordingly, Prudential did not distinguish between "participating" and "nonparticipating" policyholders in terms of eligibility to receive a variable component of consideration.
E. Form of Consideration
Some policyholders have complained about the fact that they will receive demutualization compensation in the form of cash rather than common stock. Others expressed an interest in receiving policy credits or cash, instead of stock. The Plan provides for cash distribution to a number of categories of eligible policyholders, including all policyholders that are not United States residents and policyholders whose policies are denominated in Canadian dollars. Prudential states that its reason for adopting this approach was the significant cost and complexity associated with the registration of PFI stock in the many countries in which Prudential policyholders reside. Prudential believes that it is in the best interests of all policyholders that such costs and complexity be minimized.
Prudential notes that the Plan does provide for additional compensation and a top-up to eligible policyholders that receive their demutualization consideration in the form of cash or policy credits, rather than stock.
Some individuals feel that subscription rights or preemptive rights should be provided to policyholders. Prudential asserts that most of the major life insurer demutualizations during the past 10 years did not provide policyholders with subscription rights nor did they grant preemptive rights to the policyholders. Prudential believes that the eligible policyholders are being compensated for their membership interests through the distribution of shares of stock of PFI, cash and policy credits equal to the total value of Prudential at the time of the demutualization. Prudential's independent actuary has opined that compensation received by eligible policyholders is fair and equitable, and an independent investment banking firm has opined that the provision of common stock of PFI, cash and policy credits upon the extinguishment of policyholdersí membership interests pursuant to the Plan is fair from a financial point of view to the eligible policyholders as a group.
F. Cash Default/Share Election
Some policyholders question the fairness of using cash, as opposed to stock, as the default option for policyholders who have a choice as to their form of compensation but who neglect to exercise such choice (those policyholders whose allocation is less than a cut-off set by the Board at 50 shares or less). They argue that stock can appreciate in value and cite the fact that the value of the stock of demutualized life insurers in many cases has increased substantially over the IPO price.
Prudential states that the primary purpose of the share election is to reduce Prudentialís shareholder population so that it is able to achieve quorums and not unduly expensive to service shareholders. Depending upon the size of the shareholder population, Prudential estimates that the cost of the necessary shareholder administration expenses will be between $30 million and $80 million per year. Reducing the size of the shareholder population would reduce such costs and reduced costs would result in higher earnings for PFI. Prudential has been advised by Goldman, Sachs & Co. that a reduced shareholder population should help Prudential enhance the IPO price for PFI stock and the value of the distributions Prudential will be making to all eligible policyholders in the demutualization.
Under the share election, affected policyholders are not forced to receive cash, and many policyholders who may be subject to the share election chose to receive stock as their demutualization compensation.
Moreover, policyholders who do receive compensation in the form of cash or policy credits, but not stock, will be allocated a single additional fixed component of compensation equal to two shares of PFI common stock and may also be allocated an additional variable component equal to one or more shares of PFI common stock, for a total of approximately 10% of the basic fixed and variable components, depending on the total number of shares otherwise allocable to such eligible policyholder.
The Plan also provides for a top-up, which is designed to provide additional compensation to eligible policyholders who receive any compensation in the form of cash or policy credits. Such additional compensation will depend on the performance of PFI common stock during the first 20 trading days after the demutualization. Prudentialís independent actuary confirmed in his actuarial certifications that the use of the additional compensation, to which the top-up also applies, is fair and equitable, and he specifically states that he has taken into account the fact that different classes of policyholders will receive one or more different forms of consideration in his determination of the fairness of the allocation.
G. Closed Block and Dividend Scales
Certain policyholders and other persons question the adequacy of the funding of the closed block. Questions were raised about the four-year averaging of dividend scale assumptions used by the company to determine the level of closed block funding.
Both Prudential and the Department are required under the demutualization law to appoint one or more qualified independent actuaries for the purpose of providing actuarial certifications with respect to the reasonableness and sufficiency of the assets allocated to the closed blocks. The funding of the closed blocks were found to be reasonable by the independent actuaries appointed both by Prudential and the Department, and the Department has received opinions from actuaries appointed by both Prudential and the Department as to the reasonableness and sufficiency of the assets in the closed blocks.
The closed blocks do not jeopardize policyholder protection with respect to dividends, but rather, are designed to protect those expectations. Prudential notes that the method it used prior to demutualization to determine dividends will remain substantially the same after demutualization; in particular, Prudential will continue to use the contribution method to determine dividends. Therefore, Prudential asserts that the demutualization does not impact the reasonable dividend expectations of the policyholders. Information with respect to the closed blocks, including the mechanics and advantages and disadvantages, were set forth in the Policyholder Information Booklet and in the summaries of Exhibits G and H to the Plan. This information was posted on both Prudentialís and the Departmentís web sites and was adequately available to policyholders.
The fact that the assets of the closed blocks are less than their liabilities is typical of funding of closed blocks. The amount of assets set aside for the closed blocks is calculated so that assets, together with investment cash flows and anticipated revenues from closed block policies, are expected to be reasonably sufficient to provide for all guaranteed policy benefits and expenses charged to the closed blocks as well as dividend payments. The independent actuaries appointed by both the Department and Prudential have certified as to the reasonableness and adequacy of the assets allocated to the closed blocks for such purposes. The use of closed blocks is recognized by the demutualization law and is appropriately provided for in the Plan.
With respect to utilizing a four-year averaging of each element underlying the dividend scales from 1997 to 2000, Prudential notes that the dividend scales have been essentially unchanged during this period. Although there were changes in experience during this period, the effects of these changes offset each other in many respects. Prudential therefore argues that averaging the various components of experience as they were used in setting the dividend scales in each of the four years 1997 through 2000 is appropriate.
Questions also have been raised with respect to the IPO. There are concerns that the IPO will not be fairly priced.
Prudential notes that the demutualization law specifically provides that the Commissioner may approve the sale of additional shares of stock if Prudential demonstrates that there is a need for additional capital or that the sale of stock would not significantly dilute the value of the shares distributed to the policyholders. The purchasers of the stock in the IPO will pay the market value for their shares of common stock.
The Plan contains requirements regarding the IPO in addition to those set forth in the demutualization law. These additional requirements are:
Prudential believes that the IPO will create a liquid market for policyholders to sell their shares. There have been only a handful of situations in which companies demutualize without initial public offerings, but this has never been done for a company of Prudentialís size and magnitude.
I. Class B Stock
Some policyholders have concerns about the Class B stock. They state that the Class B stock should be controlled by policyholders and fear that the issuance of the Class B stock somehow jeopardizes the assets in the closed blocks. They also are concerned that the class B shareholders would have greater rights than the policyholders who received common stock in the demutualization.
Prudential states that the Class B shares will not receive any value from any of the assets used to fund the closed blocks. Cash flows in the form of Class B dividends or any other proceeds payable to Class B shareholders will only come from assets of the closed block business that are outside the regulatory closed blocks.
Prudential notes that the Class B shares of stock will not be preferred shares. Holders of PFI common stock and holders of the Class B stock will all be common stockholders of PFI. The value of the Class B stock is intended to relate to the closed block business, which includes related assets outside the closed block. Over time, dividends on the Class B stock will represent all residual cash flows of the closed block business. The sale of Class B stock will represent less than 1% of the total voting power and equity of PFI. The Class B stock is designed to enhance the price of PFI stock and, as a result, it is anticipated that the value of the demutualization compensation received by all eligible policyholders will be enhanced.
Prudential argues that the sale of the Class B stock will not significantly dilute the value of the shares of common stock. To the contrary, Prudential expects that the Class B stock should enhance the value of the shares of the common stock, and the payment of dividends on the common stock generally is not directly dependent upon payment of dividends on the Class B stock.
J. Destacking Extraordinary Dividend
Some policyholders question the appropriateness of the destacking of the Prudential subsidiaries. They note the destacking will reduce the assets of Prudential and question why Prudential is not being compensated for the destacked subsidiaries by PFI from the IPO proceeds. One policyholder also notes that four rating agencies have downgraded Prudential's claims paying ratings since the mid 1990s.
Prudential concedes that the destacking will reduce its adjusted surplus, but believes that the destacking will not negatively affect its financial strength ratings or adversely impact its ability to pay policy claims and benefits. To the contrary, Prudential believes that the destacking will benefit the company by reducing the earnings volatility inherent in owning property and casualty insurance and securities brokerage businesses; reducing the proportion of Prudentialís capital that is invested in subsidiaries to a level more comparable to that of other large life insurance companies; improving capital efficiency by separating ownership of international life insurance operations from Prudential, thereby eliminating unnecessary capital redundancy; and positioning Prudential for possible ratings improvement. The corporate structure of the Prudential group of companies after the destacking will resemble that of other publicly traded, diversified groups of financial services companies. The destacking will diversify the sources of cash flow to PFI by permitting the destacked subsidiaries to pay dividends to PFI directly rather than through Prudential.
After the destacking, dividends paid by the destacked companies to PFI would not be affected by the restrictions on Prudentialís ability, as an insurance company, to pay dividends to PFI. Prudentialís financial strength is such that the destacking can be accomplished without affecting Prudentialís ability to carry out its obligations to policyholders and should be beneficial to the policyholders as shareholders of PFI. Prudential believes that the destacking should also have a positive impact on the share price of the common stock in the IPO and immediately thereafter.
Prudential also states that destacking will be beneficial to all eligible policyholders, including those who receive cash or policy credits that are based on the initial stock price. Prudential asserts that even though the destacking will reduce its total adjusted surplus, it will retain more than adequate capital and surplus to satisfy policyholders and other obligations and will have such capital and surplus as is reasonably necessary for its future solvency as required by N.J.S.A. 17:17C-4f.
Further, Goldman Sachs has advised Prudential that the payment of the destacking extraordinary dividend, along with the issuance of the Class B stock and the IHC debt securities, is likely to have a favorable effect on the public market valuation of the common stock, both initially and over time. Standard & Poorís, Moodyís, Fitch and AM Best have all concluded that they expect the ratings of Prudential and its affiliates to remain the same at the time of the demutualization after these transactions.
With respect to whether PFI should pay consideration for the destacked subsidiaries, Prudential asserts that the capitalization of Prudential after the destacking will be sufficient for Prudential to pay policyholder claims and maintain its financial strength ratings. Likewise, Prudential asserts that the destacking will not affect policyholder dividends because the subsidiaries being destacked, with very few exceptions, were not taken into account in Prudentialís analysis of investment earnings that support the dividend scale.
K. Additional Extraordinary Dividend
Some commenters are concerned that payment of the additional extraordinary dividend would adversely affect the financial condition of the reorganized insurer. These concerns are now moot because the request for payment of the additional extraordinary dividend was withdrawn by Prudential by letter dated October 12, 2001.
L. Stock Options
Questions are raised concerning the stock options proposed by Prudential. Stock options are considered by some to be an unjust enrichment of management. Others feel that stock options create a conflict of interest between management and policyholders as management will be encouraged to support the stock price at the expense of policyholders. Prudential believes it will be able to use stock-based compensation programs to recruit and retain high quality employees. Such programs are normally considered to provide incentive for management and employees to participate in a company's success. Prudential's officers will not be eligible to receive grants of stock options until six months after the effective date of the Plan, and senior officers will not receive options until one year after the effective date. In some cases, the stock options will be in lieu of cash compensation. Prudential believes that the stock option programs will inure to the overall benefit of policyholders and shareholders.
M. Retiree Concerns
Many retirees of Prudential have raised questions concerning the effect of the demutualization upon their pension and other post-retirement benefits. They are concerned that their pension and other benefits may be reduced following demutualization and that the company will receive demutualization compensation as owner of contracts funding pension benefits and fail to use such compensation appropriately. They also challenge a change that occurred in 1989 in the instrument used to fund the pension plan.
The Plan does not provide for, nor does the demutualization result in, the termination of or changes to Prudential's qualified pension plan. The retirement plan will remain in effect, and participants under the retirement plan will receive their pension benefits in accordance with the terms of the retirement plan. Prudential asserts that to the extent that the retirement plan receives any compensation in the demutualization, it will be passed through to the retirement plan participants. The Plan does not include any changes to retiree pension benefits and medical insurance. Although the company states that it reserves the right to make such changes in the future.
Prudential states that these comments are unrelated to the demutualization and that the Commissioner's consideration of the demutualization is not the proper forum for addressing these concerns. The funding and administration of the Prudential retirement plan is subject to the requirements of the Employee Retirement Income Security Act of 1974.
N. Prudential Misconduct
Some policyholders raise questions concerning past, alleged or potential misconduct by Prudential and its subsidiaries including fines levied against Prudential Securities, Inc., claims for unpaid overtime, handling of claims under policies, the practice of underwriting securities backed by subprime mortgages and availability of insurance products to low and moderate income policyholders. Prudential states that such issues, though important, bear no relation to the Plan and are not a proper subject for this Decision.
O. The ADR Process
A question was asked as to whether demutualization will adversely affect the ADR settlement. Prudential asserts that the Plan will have no adverse impact on any ADR settlements.
A number of persons specifically raise concerns regarding the status of their individual ADR claims under the ADR process. These policyholders request that the Plan be disapproved until their concerns are resolved. The Department's Office of Enforcement and Consumer Protection is evaluating all of these complaints, as is Prudential. The Department will mandate appropriate action in individual cases as warranted pursuant to law. Prudential asserts that the pendency of these complaints, however, should not serve as a basis for disapproving the Plan. It notes that it is impractical to expect that a company as large and complex as Prudential can ever be free of the existence and need for resolution of individual complaints and concerns.
Other ADR claimants, who previously settled their ADR claims and are now being given the opportunity to "redo" by repurchasing a policy surrendered in ADR, have complained that the premiums they are required to pay exceed the demutualization compensation they would receive. Prudential responds that by repurchasing a policy, the policyholder is obtaining all of the insurance benefits associated with the policy. The decision on whether or not to repurchase should be based first and foremost on the policyholder's insurance needs, recognizing that demutualization consideration may be an incidental benefit.
Some ADR claimants have in force policies that may become premium paying if the dividend scale is reduced. They are concerned that demutualization increases the chance that this will happen. Prudential responds that there is no change in the right of these policies to receive dividends as declared by the Board of Directors. It also notes that the closed block provides for reasonable dividend expectations.
P. Other Issues
Various miscellaneous comments were raised by policyholders, including that the Policyholder Information Booklet should have been in other languages, hearings should have been held throughout the country, the vote should have been delayed until more of the lost policyholders were found and the vote should not have been permitted to begin until after the public hearing.
Prudential responds that provision of the Policyholder Information Booklet in other languages would have been an unreasonable administrative burden and an excessive expense. Prudential's Plan was necessarily complex and information was provided by way of the Policyholder Information Booklet, websites and a policyholder help line. Multi-language operators were available by way of the policyholder help line.
Also, providing for hearings throughout the country would have required excessive expense and time, not only for Prudential, but representatives of the Department. The process used is in compliance with the demutualization law, and is consistent with that used in other demutualizations for insurers domiciled in other states. All eligible policyholders were notified of the public hearing and were advised that they could submit any comments in writing. Indeed, the majority of comments received were in writing, and the written comments were given the same consideration as comments provided at the hearing.
With respect to delay of the vote so that Prudential could continue its efforts to locate lost policyholders, Prudential notes that it made extensive efforts to locate eligible policyholders for whom it did not have current addresses by using research firms, federal and state government documents, various databases, by publishing advertisements in newspapers of national circulation, and by letter mailings to last known addresses. Prudential found approximately 1.7 million of such lost policyholders and is continuing its efforts to locate remaining lost policyholders. Accordingly, Prudential does not believe it would be appropriate to delay the demutualization for this purpose.
With respect to permitting voting to occur before the public hearing, Prudential notes that the purpose of the public hearing held pursuant to N.J.S.A. 17:17C-4d is to receive comments and information to aid the Commissioner in making a decision on the Plan, not to provide information that policyholders need in order to vote on the Plan. Prudential notes that the policyholder meeting on July 31, 2001 complied with N.J.S.A. 17:17C-5a and 5c and that policyholders were permitted to change their vote as many times as they wished prior to 4:00 p.m. on July 31, 2001.
Some public interest groups also raised issues concerning receipt of demutualization compensation by policyholders that are recipients of means-tested benefits. Prudential met with such public interest groups and has reviewed the available options. Prudential determined that simply changing the form of consideration is not a solution in all, or even most, instances for various reasons, including, among other things, possible adverse tax implications and the possibility that providing policy credits (rather than cash or stock) at the election of an eligible policyholder could be viewed as an attempt to avoid the qualification rules of social benefit programs, which can itself result in forfeiture of such benefits or worse. A bill was introduced recently in the New Jersey legislature that would exclude demutualization proceeds from consideration in determining eligibility for the New Jersey prescription plans, and Prudential supports the concept of similar legislation in other states.
N.J.S.A. 17:17C-4f provides that the Commissioner shall approve the application and permit the reorganization if he finds, following a public hearing, that the following seven conditions are satisfied.
A. The Requirements of N.J.S.A. 17:17C-4
N.J.S.A. 17:17C-4 imposes various requirements on the submission of an application of a mutual insurance company to reorganize as a stock insurance company. These requirements include approval of the Plan by at least three-fourths of the members of the Board of Directors, submission of an application containing 10 specified items, provision of a minimum of 45 days notice of the public hearing to policyholders, publication of notice of the purpose, time and place of the hearing at least twice at intervals of not less than one week in at least two newspapers of general circulation in the United States within 15 to 45 days before the hearing, and the conduct of a public hearing by the Commissioner or his designee.
All of these requirements have been satisfied in this case. The Plan was unanimously adopted by the Board of Directors and the application was determined to be complete, i.e., to contain all of the material required by N.J.S.A 17:17C-4a(1), on April 27, 2001. Notice to policyholders was provided in the mailings of demutualization information conducted between May 4 and May 31, 2001. Notice of the hearing was published in the Wall Street Journal on June 6 and 27, 2001 and on July 12, 2001; in USA Today on June 7 and 28, 2001 and on July 11, 2001; and in the Newark Star Ledger, The Press of Atlantic City, the Ocean County Observer, the Philadelphia Inquirer, the Asbury Park Press, the Home News Tribune, The Courier News and the Daily Record on June 18, 2001. This satisfies the requirement that at least two notices of the hearing be published in two newspapers of general circulation in the United States of the purpose, time and place of the hearing between 15 and 45 days before the hearing. A public hearing was conducted on July 17 and 18, 2001 by the Commissioner.
B. Fair and Equitable
N.J.S.A. 17:17C-1 defines "fair and equitable" thus:
"Fair and equitable" means that any action undertaken pursuant to this act with respect to a plan of reorganization, provides for full and proper consideration of the aggregate membership interests and corresponding values of eligible policyholders, in no manner discriminates improperly among eligible policyholders and appropriately protects the interests of eligible policyholders before and subsequent to the reorganization.
Thus there are three elements I must examine to determine if the Plan is fair and equitable. Each of these elements will be discussed.
1.Full and Proper Consideration of Aggregate Membership Interests and Corresponding Values
First, I must decide if the Plan provides for full and proper consideration of the aggregate membership interests and corresponding values of eligible policyholders. The Plan allocates 100% of the value of the company to eligible policyholders, to be distributed in the form of common stock of PFI, cash, or policy credits. The Plan also includes the issuance of additional shares of common stock of PFI in an IPO and allows for the issuance of Class B stock of PFI in a private placement. Pursuant to section 3.3(c) (ii) of the Plan, Prudential has applied to the Commissioner for approval to issue additional shares of common stock in a potential private placement, and to issue Equity Security Units (ESUs) in a public offering. The ESUs include a commitment to purchase common stock on specified terms at a specified date in 2004.
I find that eligible policyholders are initially allocated 100% of the common stock of PFI. However, I must also determine whether the company has demonstrated that the sale of additional shares in each of the four separate transactions it proposes (the IPO, the sale of Class B stock, the private placement of PFI common stock and the sale of ESUs) will not significantly dilute the value of the shares distributed to the policyholders as required by N.J.S.A. 17: 17C-3c(1).
The number of shares of common stock of PFI sold in the IPO and in the potential private placement of PFI common stock will be less than the number of shares notionally allocated to those policyholders who will receive their compensation in the form of cash or policy credits. The IPO price will be used as the basis for the value of the cash or policy credits to be distributed. The price of the shares sold in the private placement of common stock of PFI will be equal to or greater than the IPO price. In combination, these considerations allow me to conclude that the sale of additional shares in the IPO and the potential private placement of common stock of PFI does not dilute the value of the shares distributed to policyholders. My decision on the ESUs is pending and any approval must reach a similar conclusion for the ESUs.
The private placement of 2 million shares of Class B stock will yield net proceeds of less than $200 million. The sale of these shares is dilutive of the book value of the common shares distributed to policyholders. However, the amount of such dilution is not significant. The pro forma book value of the common stock falls from $35.55 to $33.96 as of June 30, 2001 as result of the sale of the Class B stock. See Amendment No.3 of the Form S-1 Registration Statement under the Securities Act of 1933 filed on behalf of Prudential Financial, Inc. on October 1, 2001, page 22. This is a reduction of less than 5%, which I do not consider to be significant. I note also that Prudential asserts that one intended purpose of the sale of the Class B shares is to increase the market value of the common stock of PFI. However, there is no assurance that the sale will have that effect.
Finally, I must conclude that the IPO establishes an appropriate price for the shares. I will do this by having Fox-Pitt, the independent investment banking firm I have retained to advise me on this matter, monitor the conduct of the IPO. I rely upon the general principle that an IPO which is properly conducted establishes an appropriate price per share. Fox-Pitt will provide an opinion as to the conduct of the IPO. I therefore find that eligible policyholders are being fully and properly compensated for their aggregate membership interests and values.
I also note that Fox-Pitt has reviewed the Plan, the Policyholder Information Booklet, and various other items, and opined that the provision of PFI common stock, cash and policy credits upon the extinguishment of the policyholdersí membership interests pursuant to the Plan is fair from a financial point of view to the eligible policyholders of the company as a group. Prudential provided a similar opinion from its investment-banking advisor, JP Morgan, as required by the demutualization law.
2. No Improper Discrimination
Secondly, I must determine whether the Plan improperly discriminates among eligible policyholders. To make this determination I must conclude that the overall method of allocating consideration among eligible policyholders is fair. In addition, I must examine, among other things, whether the deeming of certain policyholders and classes of policies to be eligible is proper, whether the provision of a variable share of compensation to nonparticipating policies and to policies that are silent as to participation is appropriate, and whether the use of the historical plus method of allocation is proper. I must determine whether distributing stock to certain eligible policyholders and cash and policy credits to other eligible policyholders is proper. I must also examine whether different calculation methods for some specific classes of policyholders is proper and whether use of an actuarial calculation date other than the adoption date in certain circumstances is proper. I must also determine that the form of consideration (stock of PFI, cash or policy credits) does not discriminate unfairly.
The Plan provides for compensation, in the form of stock, cash, or policy credits, to be distributed to eligible policyholders. The structure of the amount of this compensation is:
1. A fixed component of eight shares to each eligible policyholder.
2. A variable component, which is related to the positive contributions to surplus made by each eligible policy;
3. Additional compensation for policyholders who receive cash or policy credits.
I find that the general framework of a fixed and variable component, where the variable component is based upon positive contributions to surplus, does not improperly discriminate among policyholders. I find that this framework is: 1) explicitly permitted by statute; 2) suggested by the Actuarial Standard of Practice ("ASOP") 37; and 3) the practice in recent demutualizations. I understand the basis of this framework to be a recognition that there is both a per policyholder membership interest in the value of the company, and that the value of the company is based, to a degree, on the past and future profitability of its in force policies.
I find the fixed component of eight shares to be a fair and acceptable reflection of the relative weight to be given to these different components. There is no unique determination of the fixed share amount. The eight fixed shares provide a non-trivial amount to each policyholder. In addition, the percentage of value allocated as fixed shares is 14.4%, which is in line with other demutualizations. This allocation is also consistent with ASOP 37, which suggests that the value of the fixed component should be related to the amount of surplus not attributable to the contributions of current policyholders (orphan surplus) or that the value of the variable component should be related to the contribution to surplus of all policies eligible for consideration.
The variable component is based upon, and is proportional to, the contribution to surplus of each policy or financial management unit. The estimation of the contribution to surplus requires extensive calculation, and is based upon analysis of historical experience, projection of that experience into the future, and data specific to particular policies. Both the general framework and the specifics of this calculation have been reviewed by the independent actuaries retained by the company and by the Commissioner, and these actuaries have opined that the underlying assumptions and this methodology are reasonable and appropriate. Consequently, I find that the allocation of the variable component does not discriminate unfairly among eligible policyholders.
The Plan also involves an additional guaranteed component of compensation for policyholders who receive all of their compensation in the form of cash or policy credits (or both). This increases the amount of compensation for those receiving cash or policy credits by about 10%, and in the aggregate reduces the shares allocated to policyholders receiving stock by about 2.7%. I find that this practice is not unfairly discriminatory because these policyholders do contribute to reduced shareholder servicing costs. In addition, other than through the top-up, they do not have the benefit of upside appreciation in the value of the stock which, while not guaranteed, is nevertheless expected by the purchasers of the stock.
Furthermore, I note that the top-up provision adjusts the value of the notional shares upward if the market price of PFI shares increases by a certain amount in the first 20 trading days. I find this provision does not unfairly discriminate because eligible policyholders receiving cash or policy credits otherwise do not benefit from the possible appreciation of the stock price following the IPO.
With respect to the deeming of certain policyholders as eligible to receive demutualization compensation, I note that the definition of "eligible policyholder" at N.J.S.A. 17:17C-1 recognizes that the Plan may deem the owner of a policy to be eligible and his or her policy to be in force on the Board adoption date. The Plan deems eligible to receive demutualization consideration certain transferred Canadian policyholders; certain former Prudential HealthCare policyholders; certain ADR claimants; owners of policies issued by the designated subsidiaries (Pruco Life Insurance Company, Pruco Life Insurance Company of New Jersey and Prudential Select Life Insurance Company of America); and participating employers or certificate holders under group insurance policies and annuity contracts issued to trusts as to which Prudential is the settlor. The deeming of the transferred Canadian business is made to honor a commitment made by Prudential in 1996 to regulators in New Jersey and Canada when it sold this business to London Life. At that time, Prudential agreed that it would recognize the proprietary rights of these transferred policyholders if the company were to demutualize. I find the deeming of the transferred Canadian policyholders is appropriate in light of Prudentialís express commitments to consider these individuals in a demutualization.
Similarly, Prudential made commitments to its ADR claimants beginning in April 1998 that they would not be adversely affected in the companyís demutualization as a result of their relief choice. The company is therefore allowing ADR claimants who elected rescission of an in force policy to repurchase their policy and will deem those individuals eligible even though the repurchased policy was not in force on December 15, 2000. I again find the deeming of these ADR claimants is reasonable and appropriate in light of the express commitments made to these individuals in the context of the ADR process.
Prudential HealthCare policyholders who transferred to insurance coverage with an Aetna company following notice of nonrenewal or cancellation by Prudential are also deemed eligible because of their involuntary loss of Prudential coverage. I find the inclusion of such policyholders is reasonable in light of the involuntary nature of their loss of coverage by Prudential.
Moreover, I find that deeming eligible participating employers and individuals participating in a group under group insurance policies and annuity contracts issued to trusts for which Prudential is the settlor is reasonable and consistent with the demutualization act. The definition of "policy" at N.J.S.A. 17:17C-1 provides, in pertinent part, that in the case of a policy or contract issued to a trust established by the insurer, the Plan may treat each certificate of insurance or evidence of interest in the group coverage as a policy for the sole purpose of eligibility to receive demutualization consideration. Since the settlor of a trust is the entity that creates the trust, Prudentialís proposal is consistent with the statute.
With respect to inclusion of policyholders of the designated subsidiaries, Prudential states that the policies issued by these companies are included for several reasons. First, Prudential and Pruco Life offered substantially similar products, through the same sales force, to customers in the same demographic and geographic markets in the United States. Second, whether Prudential or Pruco Life sold a particular policyholder one of its products was largely a matter of timing. Pruco Life initially sold the Variable Life Insurance product in 1983, the Variable Appreciable Life product in 1984, and the Appreciable Life product in 1984. Issuance of these products by Pruco Life was halted in 1988 and thereafter moved to Prudential. When this change occurred, Prudential discouraged its agents from moving customers from Pruco Life to Prudential and advised that it would maintain parity between Pruco Life and Prudential products. Third, the pricing of the life insurance policies issued in the United States by both Prudential and Pruco Life has been based on the pooled mortality experience of these companies. Fourth, various programs sponsored by Prudential and Pruco Life encouraged Prudential policyholders to exchange or convert some Prudential policies for Pruco Life policies. Moreover, successor policies to Prudential policies were written by Pruco Life in satisfaction of contractual conversion rights, attained age change options and replacements. Thus, approximately one-third of Pruco Lifeís policyholders hold their Pruco Life policy or annuity contract as a result of having exercised a conversion or exchange right, an attained age change option or having replaced a policy originally issued by Prudential. Fifth, the decision to offer certain life insurance and annuity products in the United States through Pruco Life rather than Prudential was generally due to business reasons, such as tax and securities law consideration. Sixth, Prudential argues that failure to include Pruco Life policyholders would be contrary to policyholder expectations resulting in dissatisfaction which could impair the earnings of the company and value of the compensation distributed to policyholders.
I conclude that inclusion of the Pruco Life subsidiaries is appropriate and does not improperly discriminate among eligible policyholders. I find persuasive the fact that Prudential and Pruco Life did sponsor exchange and conversion programs, and offered Prudential policyholders conversion and replacement rights in Pruco Life, which encouraged Prudential policyholders to terminate their Prudential policies for Pruco Life policies. It would be unfair if a company sponsored termination of a policy issued by a mutual company, and issuance of a policy issued by a stock company, deprived those policyholders of their right to share in demutualization consideration. I note also that Prudential wrote many of the same individual products as Pruco Life, used the same sales force, in the same demographic regions, and that whether a particular product was sold by Prudential or Pruco Life as a decision of Prudential. Further support comes from the pooling of experience between Prudential and Pruco Life, which demonstrates that the entities functioned as one economic unit. For these reasons, I found inclusion of Pruco Life policies to be reasonable.
I also find that the exclusion of the policyholders of Prudential's other subsidiaries from those deemed eligible for demutualization consideration is appropriate. Prudential's health maintenance organization, dental maintenance organization and property casualty subsidiaries are not legally authorized to issue individual or group life insurance, health insurance or annuity contracts. However, the definition of "policyholder" at N.J.S.A. 17:17C-3 references N.J.S.A. 17B:18-13, which defines a policyholder in terms of individual and group life insurance, individual and group health insurance, individual and group annuity contracts, and individual pure endowment contracts. The deeming language in the definition of "eligible policyholder" at N.J.S.A. 17:17C-3 permits deeming of ownership and in force status, but does not alter the requirement that the contract which is the subject of the deeming be a life insurance policy, a health insurance policy, or an annuity or pure endowment contract. I therefore find the exclusion of the health maintenance organization, dental maintenance organization and property casualty subsidiaries is appropriate.
I find the exclusion of Prudentialís foreign life insurance subsidiaries in Brazil, Italy, Japan, Korea and other countries and of the Taiwan branch of Pruco Life is reasonable given that these entities are or were operated on a stand-alone basis, with local management, marketing and administrative functions and do or did not operate in the same geographic or demographic region or sell the same products as Prudential. I also find the exclusion of Prudential of America Life Insurance Company (Canada) is appropriate given that this entity was a stock company, owned 50% by Prudential and 50% by PPI Financial Group, that was operated as a separate entity from Prudentialís other Canadian operations.
With respect to providing a variable component of consideration to policyholders whose policies are nominally designated as nonparticipating or are silent with respect to participation, I note that the New Jersey law does not distinguish between participating and nonparticipating policies in the demutualization act. N.J.S.A. 17:17C-3c(2) states that the method for allocating consideration among eligible policyholders shall provide for each eligible policyholder to receive a fixed component of consideration or a variable component of consideration or both. The section does not limit allocation of the variable component to owners of participating policies but rather requires such distribution to "each eligible policyholder". Moreover, N.J.S.A. 17:17C-1 provides in pertinent part that an "eligible policyholder" is a policyholder who owns a policy on the board adoption date, that a "policyholder" is an owner of a policy, and that a "policy" is an individual or group policy of insurance or annuity contract issued by the mutual insurer. Since the definition of "policy" is not limited to participating policies, the definition of "eligible policyholder" includes owners of nonparticipating policies and policies that are silent with respect to participation.
Moreover, I find that nonparticipating policyholders have "membership interests and corresponding values" that are equivalent to those of participating policyholders and that they therefore should be treated in the same manner as participating policyholders. I note that both participating and nonparticipating policyholders have the right to vote for the directors of the company. See N.J.S.A. 17B:18-23. I note that New Jersey law does not distinguish between the ownership interests of participating and nonparticipating policyholders in any manner. Further, I note that mutual company policyholders, whether participating or nonparticipating, have a right to the undistributed surplus of the mutual company in the event that the company is liquidated. The New Jersey Life and Health Insurers Rehabilitation and Liquidation Act provides that in a distribution of an insolvent insurerís assets, seventh priority is given to "payments to members of domestic mutual insurance companies" and that the term "membersí is not limited to owners of participating policies. See N.J.S.A. 17B:32-71a(7). Further, the basis for calculating the variable component is the calculated actuarial contribution of the policy to the surplus of the company. Whether or not a policy has a positive actuarial contribution does not depend upon whether it is participating or nonparticipating. Finally, I note that although participating policyholders have a contractual right to a share of the companyís surplus declared as a dividend each year by the Board, they do not relinquish this right in a demutualization. Therefore, there is no reason to provide these policyholders with greater compensation in a demutualization than is provided to nonparticipating policyholders. I conclude that the distribution of a variable share to owners of policies that are nonparticipating or are silent with respect to participation is reasonable and consistent with New Jersey law.
I must also address the use of the historic plus methodology in the allocation of value. I note that Actuarial Standard of Practice 37, "Allocation of Policyholder Consideration in Mutual Life Insurance Company Demutualizations," (June 2000) adopted by the Actuarial Standards Board states that the variable component should be allocated on the basis of the actuarial contribution and defines "actuarial contribution" as:
[t]he contribution a particular policy or class of similar eligible policies has made to the companyís statutory surplus and the asset valuation reserve, plus the present value of contributions that the same policy or class of similar eligible policies is expected to make in the future.
Thus, ASOP 37 specifies that the variable component is to be allocated based on a policyís past and future contribution to the surplus of the company (the historic plus methodology). While it is not possible to precisely calculate what each policy contributes to value, ignoring estimated future profits would clearly produce an inappropriate result. I note also that in all recent demutualizations in the United States, the variable component has been based on both historical and future contributions to surplus. I therefore conclude that use of the historic plus methodology to calculate the variable component is appropriate.
In response to the commenters who want to examine the precise methodology, factors and data underlying the computation of their allocation, I note that the details of a particular policyholder's compensation would generally be extraordinarily complex and voluminous, involving financial experience over the entire life of each policy owned, as well as projections of future experience. The calculations also involve information that Prudential reasonably claims to be in the nature of trade secrets. Moreover, the details of the calculations for a particular policyholder would not shed any light on the fairness of the allocation approach, since such fairness depends on the consistency and accuracy of all calculations for all eligible policies.
Moreover, there are two classes of policyholders for which the method of calculation of compensation differs slightly. Additional calculations are required for holders of eligible policies that were subject to, or issued as a result of ADR relief, and that were in force on December 15, 2000. As a result of a commitment made to these policyholders, the compensation for these policies will be calculated to allow them to receive the same overall financial result regardless of the form of ADR relief selected. In some cases, the compensation received may be greater than that attributed to the eligible in force policy. I find this not to discriminate unfairly among policyholders, because it represents fulfillment of a commitment made by Prudential to such policyholders. In the case of policyholders that are deemed eligible because their policies are in force after a transfer (to London Life, Great-West, and Aetna), the calculation of the prospective component involves an allocation of the proceeds of the sale in proportion to prospective contribution to surplus. I find this not to discriminate unfairly among policyholders, because the sale proceeds being allocated are a measure of the prospective value of this business, and it is this value, rather than the expected future contributions, which the transferred blocks of business contributed at the time of sale. Finally, for policies that were in force on March 31, 2000, both the prospective and historical contribution to surplus were calculated based upon policy characteristics and values as of that date. It is possible for these characteristics to have changed prior to December 15, 2000, but for the policy to remain in force. In this situation, the policy's prospective contribution would be based on its characteristics as of March 31, 2000. In order to perform the calculations of actuarial contributions on a timely basis, it is necessary to select some date prior to the Board adoption date as of which to perform them. This practice has been followed in all major recent demutualizations. I find that this methodology, which is applied to all such policies in force on March 31, 2000, does not discriminate unfairly between policyholders.
I further note that the Plan provides for the distribution of cash, stock of PFI, or policy credits to eligible policyholders. The Plan provides for the distribution of policy credits to contract holders of tax deferred annuities ("TDAs"), individual annuity contracts and life insurance policies held in connection with individual retirement accounts ("IRAs"), and in connection with other non-trusteed life and annuity contracts issued in connection with qualified pension plan arrangements. I find that such distribution is consistent with the demutualization act and with applicable federal law.
With respect to TDAs and IRAs, the Internal Revenue Service has declined in the past to issue a Private Letter Ruling to a demutualizing life insurance company to the effect that stock distributed to holders of TDA s and IRAs would not be treated as a taxable distribution that could be subject to penalty taxes and could result in the disqualification of such TDA and IRA arrangements. Accordingly, most major U.S. life insurers that have demutualized have provided policy credits instead of stock or cash to the holders of TDAs and IRAs. Moreover, the Internal Revenue Service has consistently ruled that such policy credits will not be considered distributions until actually received by the contract holder in accordance with the terms of the TDA or IRA. Prudential is providing policy credits to individual holders of other non-trusteed life and annuity contracts issued in connection with qualified pension plan arrangements to avoid potentially severe tax and ERISA consequences that may result if such contract holders were to receive stock without first having established a trust. It therefore is reasonable for the Plan to distribute policy credits to holders of contracts issued as TDA s and IRAs and to individual holders of other non-trusteed life and annuity contracts issued in connection with qualified pension plan arrangements in order to avoid the potential for such severe and adverse tax consequences.
The Plan provides that cash will be the form of distribution to holders of policies issued by Prudentialís Canadian branch and denominated in Canadian dollars. Prudential has elected to distribute cash in this situation because distribution of PFI stock to Canadian residents would be subject to the securities laws and regulations of each Canadian province and territory. The company would have to satisfy, or obtain exemptions from, the securities registration requirements of each Canadian jurisdiction, which would be time consuming and costly. The Plan provides that cash will also be the form of compensation distributed to policyholders with policies denominated in U.S. currency but whose addresses of record are not in the United States. Distribution of stock to residents of foreign countries would be subject to the securities laws of those countries and compliance with such laws would again be costly and burdensome. I therefore find that the distribution of cash in both situations is reasonable and consistent with the demutualization act.
The Plan also specifies that cash will be the form of compensation to be distributed to contract holders and policyholders with unknown or undeliverable addresses. A liability will be established and cash would be distributed should such contract holders and policyholders be found. The company has elected to use cash rather than stock as the form of consideration in these circumstances in order to avoid separately escheating the original distribution of stock along with each cash shareholder dividend, should the policyholder never be located. I find that the distribution of cash in such circumstances is reasonable and consistent with the demutualization law.
Finally, eligible policyholders who are allocated 50 or fewer shares, the exact cutoff amount to be determined by the Board prior to the effective date ("share election") will receive their compensation in the form of cash unless they have elected to receive stock by returning the policyholder stock election reply card by July 31, 2001. The Plan utilizes a stock election mechanism, with a cash default for policyholders that do not respond, to reduce the number of shareholders of PFI following demutualization. Reduction in the number of shareholders will alleviate some of the difficulties that PFI may experience in achieving a quorum and will lower PFIís administrative costs associated with servicing shareholders. Prudential asserts that if it uses the maximum cutoff of 50 shares, it estimates that it will have 3.2 million policyholders that receive shares and that these 3.2 million shareholders will constitute 75% of the total shareholders of the company. Prudential asserts that the share cutoff feature has the potential to increase the IPO price, which benefits all eligible policyholders, by increasing the value of their demutualization compensation. The share election feature provides for such increase by mitigating "overhang risk", the risk that policyholders who receive small amounts of shares will sell them shortly after the IPO and potentially depress the stock price. Prudential also notes that several other prior U.S. demutualizations have utilized a share cutoff. I conclude that the share cutoff and the share election feature are consistent with the demutualization act.
3. Appropriate Protection of Interests of Eligible Policyholders Before and Subsequent to Reorganization
In examining whether the interests of eligible policyholders are adequately protected, I will review the impact of demutualization on policy benefits, including policyholder dividends and nonguaranteed elements.
Demutualization will not have any adverse result on policyholdersí premiums or benefits, cash values, policy dividend eligibility or any of Prudentialís other guarantees and obligations to policyholders under their policies. Policyholders do not have to surrender any benefits under their policies in order to receive compensation in the demutualization.
The Plan uses closed blocks to provide for the reasonable dividend expectations of some Prudential dividend-paying individual life insurance policies and individual annuity contracts after the demutualization. The closed blocks include traditional individual participating life insurance policies and individual participating deferred annuity contracts that pay experience based dividends, and their associated riders and supplementary benefits. The closed blocks also include policies in reduced paid-up or extended term insurance status, which arose from dividend-paying individual policies. Paid-up policies or riders which arose from the death of the primary insured are also included. Moreover, the closed blocks contain intermediate and weekly premium policies that the company stopped selling in 1962 and 1967 respectively, and for which premium payments were waived by the Board in the early 1980s but on which the company still pays experience-based dividends along with their associated supplementary benefits. Excluded from the closed blocks are group policies and annuities, and individual life insurance policies and individual annuity contracts that do not pay experience-based dividends, but which may have other non-guaranteed elements, and include interest sensitive and variable life insurance policies, certain individual annuity contracts and certain supplementary contracts.
The closed blocks are funded with specified assets and are composed and operated for the exclusive benefit of all closed block policies. Over time, the number of policies in the closed blocks will decrease and the closed blocks will be managed so that the assets allocated to them will be exhausted with the final payment under the last policy in the closed blocks. Premiums paid by closed block policies and investment cash flows on closed block assets will be credited to the closed block, and policy benefits, including policyholder dividends, will be charged against the closed blocks. The closed blocks will be charged for federal, state, foreign and local taxes, and for fees in lieu of internal investment expenses, certain commissions, and other expenses of administration. No other expenses or commissions are charged to the closed blocks.
In determining the elements that constituted the experience underlying the dividend scales in effect for 2000 for the U.S. closed block, Prudential averaged the experience, for each element underlying the dividend scales adopted in the four years ending with 2000. Prudential utilized such averaging because the dividend scales essentially remained unchanged during this period. I find that using averages of the experience applicable during the time period when the dividend scale was left unchanged is a reasonable interpretation of the statutory requirement that the closed block be funded based on assumptions underlying the scale in effect at the time the Board approves the Plan. Other reasonable interpretations might be possible, such as using the assumptions in effect when the Board approved the 2000 dividend scale, or as a commenter suggested, use of the assumptions in effect when the 1997 scale was declared. Each of these interpretations would have produced different funding levels, either greater or lesser, for the closed block than was produced by the average assumptions. I note that the qualified independent actuaries appointed by Prudential and by the Department found this approach reasonable. I find Prudentialís interpretation reasonable and consistent with the statute.
I find that the assets in the closed blocks are reasonable and sufficient to support the reasonable dividend expectations of policyholders assuming the experience underlying the dividend scales in effect on December 15, 2000 continue. Again, I make this finding based on the actuarial opinions of the two independent actuaries. While the method of funding the closed blocks does not provide for future expense savings to inure to the benefit of the closed blocks, the method similarly does not charge the closed block assets with any increases in expenses. Moreover, measurement of future actual expenses incurred by the closed blocks would inevitably involve subjective and arbitrary decisions about how to allocate expenses to closed block policies. The approach selected by Prudential avoids the expense of such procedures and any distortions or bias that might result.
The Plan provides other methods for protecting the reasonable dividend expectations of owners of certain classes of dividend-paying policies that do not have current dividend scales. There are certain small classes of individual disability income and daily income hospital policies on which Prudential credits dividends. The Plan provides that the dividend scales in 2000 shall continue for those policies in force on December 15, 2000 until and unless the Commissioner approves a change or discontinuance in such dividends. The Plan provides that the Commissioner may disapprove proposed actions of Prudential and its designated subsidiaries that change non-guaranteed elements in certain situations. The Plan also provides for the Commissionerís review of changes in annuity crediting rates applied to covered account values in individual annuity contracts in certain circumstances. I find that these protections of non-guaranteed elements appropriately protect the interests of the owners of such policies and contracts following the demutualization.
Finally, in reviewing whether interests of eligible policyholders are adequately protected, I must consider the financial condition of the company following demutualization. For the reasons below regarding the financial condition of the resulting insurer, I find that eligible policyholders will continue to be insured by a financially healthy insurer with the same ratings as the current mutual insurer.
C. Promotion of the Best Interest of the Mutual Insurer and its Policyholders
In determining whether the Plan promotes the best interest of the mutual insurer, I must consider that after reorganization the former mutual insurer will have less capital and surplus to support its obligation to policyholders. On the other hand, the former mutual insurer will have a strong parent that can compete effectively in the global financial services market and acquire capital which it can use to support the development of new products and services to be offered through the former mutual company. The former mutual company will also be relieved of the obligation to support some of its more volatile subsidiaries, including the property and casualty insurance subsidiaries and the securities brokerage subsidiaries.
With respect to the interests of policyholders, the Plan provides for the payment of consideration for extinguishment of the membership interests of eligible policyholders while preserving all of their policy and contract benefits. Closed blocks are established in order to provide for the reasonable dividend expectations of policyholders. Although the capital and surplus of the reorganized insurer will be reduced, the financial condition of the reorganized company will still be strong and the company will be supported by a publicly traded parent that has access to capital in the financial markets that can be used to support the operations of the insurer.
D. Enhancement of the Operations of the Reorganized Insurer
I find that the Plan provides for the enhancement of the operations of the reorganized insurer, for several reasons.
First, demutualization will make it easier for the company to raise capital through the sale of equity or debt. The formation of an upstream holding company, which is made possible by the demutualization, will facilitate raising of capital. Increased access to capital will make it easier for the reorganized company to develop new products and services.
Second, demutualization will facilitate the acquisition and ownership of related financial services companies that complement the role of the company as a life insurer. Complementary functions include the ability to sell multiple products or to diversify risk.
Finally, demutualization will provide for greater accountability by management, both through effective governance by stockholders and through the use of performance based compensation, such as stock options.
E. Not Contrary to Law
I find that the Plan is consistent with the demutualization act and other pertinent State insurance law as well as federal law regarding tax, securities and employee benefit plans.
As previously discussed, the Plan was adopted by the required number of directors and approved by the required number of policyholders. The Plan extinguishes all membership interests of the mutual insurer and allocates 100% of the common stock of PFI to eligible policyholders. Although common stock is not actually distributed to all eligible policyholders, the value of that stock is distributed in the form of cash or policy credits. I therefore find that 100% of the value of the ultimate parent of the reorganized insurer is allocated to eligible policyholders as is required by N.J.S.A. 17:17C-3c(i). I further find that Prudential has demonstrated that the sale of additional shares of stock of PFI in the IPO, in the potential private placement, in the ESUs and through the sale of the Class B stock will not significantly dilute the value of the shares distributed to policyholders. I make this finding because the aggregate of the number of shares to be sold in the IPO and the potential private placement is less than the number of shares allocated to those eligible policyholders receiving their distributions in the form of cash or policy credits. Further, the dilution in book value resulting from issuance of the Class B stock is under 5% and therefore is not considered significant.
I find that the method for allocation of consideration among eligible policyholders is fair and reasonable. The methodology includes distribution of a fixed and variable share and is based upon the contribution to surplus using a historic plus methodology, which is expressly recognized in ASOP 37. Moreover, for the reasons discussed above, I find that the inclusion of the deemed policies and policyholders is fair and reasonable.
I further note that the Plan provides for the distribution of cash, stock of PFI, or policy credits to eligible policyholders. The Plan provides for the distribution of policy credits to contract holders of tax deferred annuities ("TDAs"), individual annuity contracts and life insurance policies held in connection with individual retirement accounts ("IRAs"), and in connection with other non-trusteed life and annuity contracts issued in connection with qualified pension plan arrangements. I find that the distribution of policy credits in such circumstances is consistent with the demutualization act and with applicable federal law.
I find that the closed block is an appropriate method of protecting the reasonable dividend expectations of certain policyholders. See my discussion of the closed block in evaluating whether the plan provides appropriate protection of the interests of eligible policyholders before and after the reorganization on page 71 supra. I find that the assets allocated to the closed blocks, together with the revenue of the closed blocks, are reasonably sufficient to support the business in the closed blocks until the last policy in the closed blocks has terminated, including payment of claims, expenses and taxes. I further find that the funding of the closed blocks provides for the continuation of the dividend scales in effect on December 15, 2000 if the experience underlying those scales continues and for appropriate adjustments in the scales if the experience changes. I make this finding based on the opinion of the independent actuary I have appointed to assist me in this matter. I note that the Plan does identify the assets allocated to the closed blocks and provides for periodic reporting to me of the operations of the closed blocks.
With respect to TDAs and IRAs, the Internal Revenue Service has declined in the past to issue a Private Letter Ruling to a demutualizing life insurance company to the effect that stock distributed to holders of TDAs and IRAs would not be treated as a taxable distribution that could be subject to penalty taxes and could result in the disqualification of such TDA and IRA arrangements. Accordingly, most major U.S. life insurers that have demutualized have provided policy credits instead of stock or cash to the holders of TDAs and IRAs. Moreover, the Internal Revenue Service has consistently ruled that such policy credits will not be considered distributions until actually received by the contract holder in accordance with the terms of the TDA or IRA. Prudential is providing policy credits to individual holders of other non-trusteed life and annuity contracts issued in connection with qualified pension plan arrangements to avoid potentially severe tax and ERISA consequences that may result if such contract holders were to receive stock without first having established a trust. It therefore is reasonable for the Plan to distribute policy credits to holders of contracts issued as TDAs and IRAs and to individual holders of other non-trusteed life and annuity contracts issued in connection with qualified pension plan arrangements in order to avoid the potential for such severe and adverse tax and/or ERISA consequences.
With respect to the provisions of applicable federal law, Prudential has obtained no-action letters from the Securities and Exchange Commission and private letter rulings from the Internal Revenue Service. Although Prudential requested a prohibited transaction exemption ("PTE") from the United States Department of Labor on March 29, 2001, it has not received such exemption to date. One commenter argues that Prudentialís failure to obtain a final PTE means that the demutualization is contrary to law, is not fair and equitable and does not promote the best interests of Prudential and its policyholders. I do not agree that failure to obtain a final PTE produces such results. First, in requesting the exemption, Prudential did not concede that the demutualization transaction was prohibited by ERISA. In fact, distribution of compensation may not be considered a "transaction" for ERISA purposes, but rather more akin to a stock dividend or stock split that the Department of Labor has found not to constitute the acquisition of securities for prohibited transaction purposes. Moreover, to have a prohibited transaction in any particular instance, Prudential must either be a "party in interest" to the plan under ERISA section 3(14) or a "disqualified person" under IRS Code section 4975(e)(2). Prudentialís issuance of an insurance contract to an ERISA plan does not mean that Prudential is a party in interest with respect to the particular employee benefit plan. Moreover, the Department of Labor has already issued 13 PTEs for various insurance company demutualizations and no state insurance department has conditioned approval of the demutualization on the prior issuance of a PTE. Additionally, it is clear that the Department of Labor does not believe that prior issuance of a PTE is necessary since 11 of the 13 of the PTEs it has granted have been issued after the domestic state insurance department approved the demutualization. Prudential notes that if it does obtain a PTE after the effective date of its demutualization, it will not be in violation of ERISAís prohibited transaction rules because Prudential has requested a retroactive effective date for the exemption.
I conclude that Prudentialís failure to obtain a final PTE from the United States Department of Labor prior to the effective date of the Plan does not render the Plan contrary to law, unfair or inequitable or contrary to the best interest of Prudential or its policyholders because the request for an exemption does not mean that the transaction is prohibited, because the Department has issued PTEs in 13 prior demutualizations and that 11 of those 13 were issued after the demutualization had become effective.
F. The Plan is not Detrimental to the Public
Prudential maintains the availability and quality of the insurance products it markets to the public will not be diminished as a result of its demutualization. Rather, the company maintains that the reorganization will strengthen its position in the financial services industry and provide it with greater access to capital to fund the development of new products and services. Prudential asserts that it will continue to service various markets following demutualization, including low and moderate-income markets. The company is developing various strategies to reach such markets, including marketing through the job site, over the Internet and through affiliations with third parties.
A concern was raised at the hearing and in the written comments that the demutualization would adversely affect Prudential retirees. However, Prudential has testified that there will not be any change in retiree benefits solely as a result of the demutualization. In the past, Prudential has assessed its benefit programs with respect to both current and former employees to ensure that such programs are commensurate with market standards. It states that such assessments will continue in the future as Prudential strives to offer competitive employee benefit programs.
Another concern was raised at the hearing regarding whether the receipt of cash or stock by policyholders who are participants in social benefit programs could disqualify such policyholders from continued eligibility for such programs. Prudential advises that in those instances where disqualification from benefit programs may result from receipt of demutualization consideration, changing the form of such consideration will not resolve the problem. Prudential has sent notices to all of its policyholders suggesting that they seek assistance from the agencies from which they receive benefits to determine if the receipt of demutualization will have an adverse impact, and if so, how that impact can be mitigated. Moreover, operators at Prudentialís Demutualization Information Center are using information prepared with the assistance of various public interest groups to refer policyholders on a state-by-state basis to agencies that may be able to assist them.
Another concern raised at the hearing was whether Prudential would continue its community involvement and investment after the demutualization. Prudential testified that it has no intention of altering its strong support of the community, particularly in the areas of affordable housing, education and minority business.
Based on Prudentialís continued commitment to community projects, attempts to mitigate the impact of receipt of demutualization consideration on those policyholders receiving social program benefits, and the continued availability of products and services, I find that the Plan is not detrimental to the public.
G. The Reorganized Insurer Will Have an Amount of Capital and Surplus Reasonably Necessary for its Future Solvency
The demutualization and the destacking extraordinary dividend will reduce Prudentialís adjusted surplus (sum of surplus and AVR). If these transactions had occurred as of December 31, 2000, on a pro forma statutory accounting basis, Prudentialís adjusted surplus would have been reduced by approximately $4.369 billion. Prudentialís adjusted surplus would have been $7.339 billion as of December 31, 2000 following these transactions. A similar calculation as of June 30, 2001 would show a reduction of $4.666 billion, from $12.164 billion to $7.498 billion.
In connection with the demutualization, the company will pay $450 million in cash to policyholders, including transferred Canadian policyholders, whose policies are denominated in Canadian dollars assuming an IPO price of $30 per share and no top-up. This would reduce the capital and surplus (plus AVR) of Prudential by $450 million.
Also in connection with the demutualization, the company will establish liabilities of $1.1 billion for policy credits provided to policyholders assuming an IPO price of $30 per share and no top-up. PFI will contribute a note or notes to Prudential in the same amount ($1.1 billion). The Department will accept these notes as admitted assets subject to certain conditions. Satisfaction of the conditions under which the notes will be treated as admitted assets is made a condition of the approval of the demutualization. Therefore, at the time of demutualization, there will be no impact on capital and surplus of Prudential as the result of policy credit liabilities.
Prudential has made a separate application to pay an extraordinary destacking dividend consisting of the stock, and related assets and liabilities, of a number of subsidiaries, including those engaged in securities, asset management, property and casualty insurance, and international insurance. Payment of this dividend would reduce the adjusted surplus of Prudential by $4.216 billion, as of June 30, 2001.
As stated in Order No. A01-154 also issued on this date, I have determined that this dividend should be approved. I find that, even taking account of payment of this extraordinary dividend, Prudential will have capital and surplus reasonably sufficient for its future solvency.
In reaching these conclusions, I rely on the following:
1. The company will have an amount of capital and surplus exceeding the statutory minimum.
2. The estimate of the ratio as of June 30, 2001 (taking account of both the demutualization and destacking) of Total Adjusted Capital to Risk Based Capital exceeds the Company Action level.
3. Standard and Poor's, Moody's, Fitch and A.M. Best have opined that the demutualization, including the destacking dividend, will not negatively affect the company's current financial strength rating. The current ratings are consistent with reasonably sufficient capital and surplus.
I also note that Prudential estimates its losses arising in connection with the September 11, 2001 terrorist attacks will have a negative effect on income from continuing operations, before income taxes of between $125 million and $205 million, and on net income of between $75 million and $125 million for the nine months ended September 30, 2001. Prudential estimates gross losses, before release of reserves and reinsurance recoveries, to aggregate between $250 and $400 million. I find that these losses and projected losses do not impact my analysis of the financial condition of the reorganized insurer because these losses do not reduce the surplus of the reorganized insurer below an acceptable level.
For the above reasons, I find that Prudentialís Plan satisfies the standards for approval set forth at N.J.S.A. 17:17C-4f.
THEREFORE IT IS on this 15th day of October 2001
ORDERED that Prudential's Plan to reorganize from a mutual life insurance company to a stock insurance company is approved subject to the following conditions.
1. The Commissioner shall review the terms of the IPO and of all transactions effected by PFI and/or Prudential Holdings pursuant to section 3.3(c)(ii) of the Plan, including the private placement of common stock of PFI and the issuance of Equity Security Units, and shall find, prior to the closing of such transactions, that the terms of each such transaction promote the best interests of eligible policyholders.
2. Any stock options granted under the executive stock option program, as described in the Plan, will be granted at the market price at the date of the grant of those options. No stock options may be granted other than those described in the Plan for one year following the effective date of the Plan.
3. The notes issued by PFI to Prudential in the amount of the policy credit liabilities shall meet the conditions to be admitted assets as of the effective date of the Plan.
4. Opinions from an investment banker appointed by Prudential and an investment banker appointed by the Commissioner shall confirm that the IPO was conducted in a manner consistent with customary practices for similar offerings. Both opinions shall be submitted to the Commissioner prior to the effective date.
5. Opinions shall be received from an investment banker appointed by Prudential and an investment banker appointed by the Commissioner that, at the time of the IPO, the Plan is fair to eligible policyholders, as a group, from a financial point of view. Both opinions shall be submitted to the Commissioner prior to the effective date.
6. The sum of:
(a) the number of shares of common stock of PFI issued in the IPO,
(b) the number of shares of common stock of PFI sold in a private placement, if any, to private investors concurrently with the IPO, and
(c) the number of share equivalents (gross proceeds divided by the IPO price) arising from any public offering of Equity Security Units concurrently with the IPO,
shall be less than the number of shares of common stock of PFI notionally allocated to eligible policyholders who received their demutualization compensation in the form of cash or policy credits. This condition may be waived with the approval of the Commissioner provided the standards in N.J.S.A. 17:17C-3c(1)(a) or (b) are satisfied.
7. If the effective date of the Plan is not on or before December 31, 2001, then the following additional conditions (a) and (b) must be satisfied:
(a) 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.
(b) 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.
If conditions (a) and (b) above are not satisfied, and Prudential desires to proceed with demutualization, it must submit a request for waiver of these conditions to the Commissioner, detailing why the demutualization should proceed notwithstanding the failure to satisfy the above conditions, and
IT IS FURTHER ORDERED that the private placement of PFI common stock described in the September 27, 2001 memorandum to former Commissioner Karen Suter is approved pursuant to section 3.3(c)(ii) of the Plan, subject to the Commissionerís review of the terms of the private placement as described in condition one above. A decision has not yet been reached with respect to approval of the Equity Security Units.
Acting Commissioner for Insurance
APPLICATION OF THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
Item Number Description
PRU 1 Prudential Insurance Company of America Application to Demutualize as amended
PRU 2 Summary of Prudentialís Policyholder Inquiry Resolution Process
PRU 3 Memo to Commissioner Suter from Prudential Re: Policyholder Eligibility dated 6/5/01
PRU 4 Memo to Commissioner Suter from Prudential Re: Determination of Ownership of Insurance Policies and Annuity Contracts dated 6/5/01
PRU 5 Memo to Commissioner Suter from Prudential Re: In Force Provisions dated 6/5/01
PRU 6 Memo to Commissioner Suter from Prudential Re: Eligibility of Canadian Policyholders dated 6/5/01
PRU 7 Memo to Commissioner Suter from Prudential Re: Eligibility of Policyholders of Subsidiaries dated 6/12/01
PRU 8 Memo to Commissioner Suter from Prudential Re: ADR Claimants dated 6/12/01
PRU 9 Memo to Commissioner Suter from Prudential Re: Qualification to Vote on the Plan of Reorganization and the Voting Process dated 6/12/01
PRU 10 Affidavit of Reinstatement Mailing Notice dated 6/20/01; Affidavit Regarding the Mailing of London Life Reinstatement Notices dated 6/15/01
PRU 11 Memo to Commissioner Suter from Prudential Re: Types of Compensation to be Distributed to Eligible Policyholders dated 6/19/01
PRU 12 Memo to Commissioner Suter from Prudential Re: Distribution of Shares of Prudential Financial, Inc. dated 6/19/01
PRU 13 Memo to Commissioner Suter from Prudential Re: Allocation Principles and Methodology dated 6/19/01
PRU 14 Memo to Commissioner Suter from Prudential Re: Providing for Policyholdersí Reasonable Dividend Expectations dated 6/19/01
PRU 15 Memo to Commissioner Suter from Prudential Re: Destacking of Subsidiaries dated 7/2/01
PRU 16 Memo to Commissioner Suter from Prudential Re: The Corporate Governance of Prudential Financial, Inc. dated 6/29/01
PRU 17 Memo to Commissioner Suter from Prudential Re: Use of Stock in Compensation and Benefits Plans and Programs dated 6/29/01
PRU 18 Memo to Commissioner Suter from Prudential Re: Cash Dividend, Class B Stock and IHC Debt Securities dated 7/2/01
PRU 19 Written Statement of Arthur F. Ryan dated 7/2/01
PRU 20 Written Statement of John M. Liftin dated 7/2/01
PRU 21 Written Statement of Helen M. Galt dated 7/2/01
PRU 22 Written Statement of Daniel J. McCarthy dated 7/2/01
PRU 23 Written Statement of C. Edward Chaplin dated 7/2/01
PRU 24 Written Statement of Priscilla Myers dated 7/2/01
PRU 25 Written Statement of William F. Cruger dated 7/2/01
PRU 26 Written Statement of Mark B. Grier dated 7/2/01
PRU 27 US Policyholder Mailing Sample
PRU 28 Canadian Retained Mailing Sample
PRU 29 Canadian Transferred Mailing Sample
PRU 30 National Change of Address to Certain ADR Claimants
PRU 31 Group Policyholder Guide
PRU 32 IRS Ruling dated June 12, 2000
PRU 33 IRS Ruling dated April 26, 2000, as supplemented
PRU 34 No-action Letter from SEC dated March 14, 2001, Commission Free Sales and Purchases Program
PRU 35 No-action Letter from SEC dated March 14, 2001, Section 3(a)(10)
PRU 36 DOL Opinion, Trust Requirements of Title I Ė ERISA
PRU 37 DOL Opinion, Stock as Pal Assets
PRU 38 DOL Opinion, Experience Rated Contracts
PRU 39 Standard & Poorís ratings, received July 30, 2001
PRU 40 Moodyís Investors Service, Rating Action, dated July 13, 2001
PRU 41 Fitch Comments on Prudential Insurance Co. of America, dated July 13, 2001
PRU 42 Letter of Suzanne T. Marquard to the Honorable Karen Suter dated August 2, 2001 regarding Notices to Certain ADR Claimants
PRU 43 Letter of Suzanne T. Marquard to the Honorable Karen Suter dated August 6, 2001 with attached Certification of Vote on Plan of Reorganization and Certification of Ballot Receipt and Tabulation
PRU 44 Memo to Commissioner Karen Suter dated August 13, 2001 regarding Regulatory Filings and Consents
PRU 45 Affidavit of Policyholder Mailing signed by Beth Anne Connelly dated August 16, 2001
PRU 46 Post-Hearing Memorandum submitted by LeBoeuf, Lamb, Greene & MacRae, L.L.P. on behalf of The Prudential Insurance Company of America dated August 16, 2001
PRU 47 Vote Reminder Cards
PRU 48 Press Release of A.M. Best Co. dated August 3, 2001 affirming financial strength rating of The Prudential Insurance Company of America, Pruco Life Insurance Company and Pruco Life Insurance Company of New Jersey
PRU 49 Letter of William E. Ryan III to the Honorable Karen L. Suter dated August 16, 2001 regarding Effect of Prudential Demutualization on ERISA Plans
PRU 50 Memorandum to the Honorable Karen L. Suter supplementing memorandum dated March 14, 2001 regarding the Sale of Additional Shares of Stock of Prudential Financial, Inc. in Connection with the Plan of Reorganization of The Prudential Insurance Company of America
PRU 51 Set of letters from Suzanne T. Marquard to the Honorable Karen L. Suter responding to various public comments submitted with respect to the Plan of Reorganization
PRU 52 Memorandum of Suzanne T. Marquard to Commissioner Karen L. Suter dated August 28, 2001 Re: Additional Information Regarding Prudential Financial, Inc. Stock Option Plan
PRU 53 Memorandum of The Prudential Insurance Company to the Honorable Karen L. Suter dated September 25, 2001 Re: The Proposed Public Offering of Equity Security Units and Private Placement of Common Stock of Prudential Financial, Inc. in Connection with the Plan of Reorganization of The Prudential Insurance Company of America
PIR 2 Letter of Suzanne T. Marquard to R. Neil Vance dated July 6, 2001 Re: Information Request No. 2
PIR 7 Letter of Suzanne T. Marquard to R. Neil Vance dated August 20, 2001 Re: Information Request No. 7
DOBI 1 Letter of Fox-Pitt, Kelton Inc. to the Honorable Karen L. Suter, dated August 15, 2001
DOBI 2 Statement of Actuarial Opinion addressed to the Honorable Karen L. Suter from Charles Carroll, dated August 27, 2001
DOBI 3 Independent Public Accountantís Report on Applying Agreed-Upon Procedures, dated August 28, 2001, submitted by Arthur Andersen LLP
PUB 1 Letter from Daniel F. Case, FSA, dated May 9, 2001 as supplemented by letter dated July 24, 2001.
PUB 2 Letter from A. John Frey, Jr., dated May 18, 2001.
PUB 3 Letter from Patricia K. Newman, CLU, dated May 23, 2001.
PUB 4 Letter from Donald W. Cady dated May 29, 2001, as supplemented by letter dated July 7, 2001.
PUB 5 Letter from Donald E. Casey dated June 1, 2001.
PUB 6 Letter from John C. and Bonnie E. Snowdon dated June 4, 2001.
PUB 7 Letter from John P. Anderson dated June 21, 2001.
PUB 8 Letter from Mark Burgess dated June 22, 2001.
PUB 9 Letter from William D. Riccard, undated. (Withdrawn)
PUB 10 Letter from Thomas J. Lucas dated June 27, 2001.
PUB 11 Letter from Frank J. Altschul, Jr., dated July 2, 2001.
PUB 12 Letter from H. Robert Freer dated July 4, 2001.
PUB 13 Letter from Raymond W. Miller dated July 6, 2001, as supplemented by letter dated June 14, 2001.
PUB 14 Letter from Michael P. Malakoff dated July 9, 2001.
PUB 15 Letter from Louis O. Storm dated July 12, 200l.
PUB 16 Letter from Samuel W. Halper dated July 12, 2001.
PUB 17 Letter from Scott B. Lakin dated July 11, 2001.
PUB 18 Letter from Alfred Andrews, received June 6, 2001.
PUB 19 Letter from Shari Lynn Andis, dated May 23, 2001.
PUB 20 Letter from Michele Bidic Ziemba, dated June 25, 2001.
PUB 21 Letter from Eugene W. Bellospirito, dated July 20, 2001.
PUB 22 Letter from Joan T. Bessey, dated May 24, 2001.
PUB 23 Letter from James E. Creeden, dated March 22, 2001.
PUB 24 Letter from W. R. Ferguson, received May 23, 2001.
PUB 25 Letter from Winston Hawkins, dated June 5, 2001.
PUB 26 Letter from Jerry Jernigan, dated May 22, 2001.
PUB 27 Letter from Jane Kindred, dated May 17, 2001.
PUB 28 Letter from Arnold Layne, received June 26, 2001.
PUB 29 Letter from Owen & Joan Lee, received June 6, 2001.
PUB 30 Letter from Joyce K. Lessley, dated June 1, 2001.
PUB 31 Letter from Russell F. Lantz, Sr., dated May 16, 2001.
PUB 32 Letter from C. Douglas Neal, dated May 8, 2001.
PUB 33 Letter from William T. Ossmer, dated May 7, 2001.
PUB 34 Letter from Dennis Pekin, dated June 15, 2001.
PUB 35 Letter from Patricia Wheaton, dated June 11, 2001.
PUB 36 Letter from Joseph Zianno, dated May 23, 2001.
PUB 37 Letter from Barry A. Weprin, dated July 24, 2001.
PUB 38 Letter from Michael Sondow, dated July 16, 2001.
PUB 39 Letter from R. Robinson Chance, Jr., dated July 9, 2001.
PUB 40 Testimony of Leila Amirhamzeh, dated July 17, 2001.
PUB 41 Testimony of Deborah Goldberg, dated July 17, 2001.
PUB 42 Letter of Joan Angela Truman Smith, dated November 5, 2001.
PUB 43 Statement of Charles B. Dupree, dated July 17, 2001.
PUB 44 Testimony of Public Interest Law Office of Rochester/Greater Rochester Community Reinvestment Coalition, dated July 17, 2001.
PUB 45 Comment Summary of Thomas B. Tierney, dated July 17, 2001, as supplemented by letter dated August 16, 2001.
PUB 46 Testimony of Matthew Lee, dated July 17, 2001.
PUB 47 Letter from Nathaniel Orenstein and Walter Partan, dated July 16, 2001.
PUB 48 Letter from James J. Cunningham, dated June 15, 2001, as supplemented.
PUB 49 Letter of Charles E. Berry, dated July 7, 2001.
PUB 50 Letter of Roy H. Brown, received June 26, 2001.
PUB 51 Letter of R. F. Bullock, dated July 17, 2001.
PUB 52 Letter of Dennis Cole, dated June 11, 2001.
PUB 53 Letter of Edward & Geraldine Curtin, dated July 5, 2001.
PUB 54 Letter of Don E. Dickhut, received June 15, 2001.
PUB 55 Letter of Jacqueline L. Frank, Dated May 25, 2001.
PUB 56 Letter of Jeffrey H. Garland, dated May 30, 2001.
PUB 57 Letter of Sandra R. Griffin, dated June 18, 2001, as supplemented by letter dated June 30, 2001.
PUB 58 Letter of Robert L. Haas, dated July 15, 2001.
PUB 59 Letter of Rita S. Hosbach, dated June 6, 2001.
PUB 60 Letter of James J. Quiqley, Jr., dated August 11, 2001.
PUB 61 Letter from James H. Hunt and J. Robert Hunter, dated April 10, 2001.
PUB 62 Letter from N.G. Johnston, dated May 23, 2001.
PUB 63 Letter from Stephen L. Kayser, dated June 25, 2001.
PUB 64 Letter of George E. Keller, dated July 17, 2001.
PUB 65 Letter of William Mildred Kinser, dated June 29, 2001.
Letter of William C. Kinser, dated July 4, 2001.
Letter of William C. Kinser, dated June 27, 2001.
Letter of William C. Kinser, dated June 20, 2001.
Letter of William C. Kinser, dated July 10, 2001.
Letter of William C. Kinser, dated August 8, 2001.
PUB 66 Letter of George W. Little, dated June 12, 2001.
PUB 67 Letter of Charles P. Mullin, dated July 16, 2001.
PUB 68 Letter of Mary Nicolaides, dated July 6, 2001.
PUB 69 Letter of Real-Normandeau, received June 18, 2001.
PUB 70 Letter of Robert D. Notton, dated June 29, 2001.
PUB 71 Letter of Stan Nykiel, dated June 24, 2001.
PUB 72 Letter of Gail Flynn, dated July 9, 2001.
PUB 73 Letter of Joseph N. Kravec, Jr., dated July 16, 2001.
PUB 74 Letter of Elsie A. Kappmeier, dated July 8, 2001.
PUB 75 E-mail from Rich Dahlberg, dated June 26, 2001.
PUB 76 Letter from Michelle Byrne dated May 24, 2001.
PUB 77 Letter from Bruce A. Poulsen, received July 3, 2001.
PUB 78 Prudential Leader, Volume 6, Number 1, January 2001.
PUB 79 Letter from Dorothy & Neely Ragan, dated July 5, 2001.
PUB 80 Letter from Joseph F. Schultz, dated June 29, 2001.
PUB 81 Letter from Edward C. Tate, dated July 11, 2001.
PUB 82 Letter from Tom Teune, dated June 20, 2001.
PUB 83 Letter from Dorothy M. Theriault, dated June 26, 2001.
PUB 84 Letter from Dave & Carol Van Hoomissen, dated July 6, 2001.
PUB 85 Letter from Michael R. Vitale, dated July 2, 2001.
PUB 86 Letter from Donald J. Ward, dated June 4, 2001.
PUB 87 Letter from George W. West, dated June 28, 2001.
PUB 88 Letter from Walter Thedford, Jr., dated June 26, 2001.
PUB 89 Letter from Edward J. Wilkens, dated July 2, 2001.
PUB 90 Letter from Michael Teichman, dated June 19, 2001.
PUB 91 Letter from Douglas C. Conroy, dated July 10, 2001.
PUB 92 Letters from Stephen Stover, dated May 19, 2001.
PUB 93 Letter from David Dougherty, dated July 18, 2001.
PUB 94 Letter from Ollie Askey, dated July 9, 2001.
PUB 95 Letter from Robert N. Lothes, dated June 21, 2001.
PUB 96 Letter from Daniel C. Hickey, dated July 25, 2001.
PUB 97 Letter from Donald L. Crowther, Jr., dated July 25, 2001.
PUB 98 Letter from Earl E. Walters, dated July 24, 2001.
PUB 99 Letter from Andrew B. Perras, dated July 20, 2001, as supplemented by letter dated August 10, 2001.
PUB 100 Letter from Harry R. Scharlach, dated July 20, 2001, as supplemented by letter dated August 6, 2001.
PUB 101 Letter from David G. Tobias, dated July 24, 2001.
PUB 102 Letter from Wesley D. Plante, dated June 4, 2001.
PUB 103 Letter from Libby Strutzenberg, dated July 28, 2001.
PUB 104 Letter from James A. G. MacPherson, dated June 4, 2001.
PUB 105 Letter from Paul Benton Weeks, III, dated July 23, 2001.
PUB 106 Letter from Howard LeVine, dated July 25, 2001.
PUB 107 Letter from David Gollan, dated July 21, 2001.
PUB 108 Letter from Lea Squitieri, dated August 3, 2001.
PUB 109 Transcript, News at Ten, KOMU-TV (NBC) Channel 8, dated July 17, 2001; Transcript, News at Ten, KOMU-TV (NBC) Channel 8; dated July 16, 2001.
PUB 110 Letter from Robert H. Iverson, dated August 14, 2001.
PUB 111 Letter from Robert B. Max, dated July 24, 2001.
PUB 112 Letter from Vivian C. Mossberg, dated August 16, 2001.
PUB 113 Letter from Andrea Luquetta and Thomas Callahan (MACDC) dated August 14, 2001.
PUB 114 Letter from William T. Fidurski, dated August 10, 2001.
PUB 115 Comments of Martha Bergmark (NLADA), dated August 17, 2001.
PUB 116 Letters from Melburne D. McLendon, dated July 30, 2001 and August 13, 2001.
PUB 117 Letter from Charles E. Dumays, dated May 16, 2001.
PUB 118 Letter from Charles B. Dupree, (updated) enclosing letter of David L. Renz, dated July 21, 2001 and e-mail of David L. Renz, dated July 25, 2001.
PUB 119 Letter from Sally A. Katz, dated July 30, 2001.
PUB 120 Complaint of Elizabeth A. Torode, dated August 12, 2001
PUB 121 Letter from Chuck Hupp, dated August 10, 2001
PUB 122 Letter from Austin Clyde Drewing, dated July 5, 2001