With billions of dollars at stake and after little debate, New Jersey lawmakers are poised to adopt legislation governing the reorganization of Prudential Insurance Co. of America that consumer advocates say contains troubling loopholes that could shortchange nearly 11 million policyholders.
The legislation, which was drafted by Prudential in meetings with state regulators and comes up for a vote today in the state Assembly, provides a framework for distributing stock to the policyholders as Prudential shifts from a mutual insurer, nominally owned by its customers, to a publicly traded company.
The consumer advocates have praised Prudential, based in Newark, N.J., for deciding to reorganize in a way that compensates policyholders rather than giving them nothing, as some of the largest insurers based in New York are proposing. But they are concerned that Prudential's pledges are not detailed in the legislation.
At issue is how to determine each policyholder's share of the company's worth. Traditionally, when insurers have switched to public ownership, they have used their accumulated profits as a starting point in that calculation. In Prudential's case, that is $20 billion.
Prudential says it is unclear what dollar amount will be used as the benchmark but that it is committed to giving policyholders stock worth the full value of the company, an amount that will be determined by actuaries.
The consumer advocates say loopholes and exemptions in the pending measure could reduce the amount of stock that policyholders receive.
"They're saying, 'Trust us,' " said Jason Adkins, founder of the Center for Insurance Research in Cambridge, Mass.
Such concerns are misplaced, Prudential executives and state lawmakers say.
"If in fact the concerns of the consumer advocates are legitimate," said Richard Codey, the state Senate's minority leader and a co-sponsor of the bill, "then you have the commissioner of insurance as the safety net."
The critics say their qualms are justified because of Prudential's recent troubled past and its history of close ties to state officials.
The company's reputation has taken a pounding for most of the decade as customers complained of repeated deception in the sale of securities and insurance policies.
Prudential's securities unit paid $1.5 billion in fines, compensation and legal costs after customers of risky limited partnerships suffered heavy losses.
Prudential also is expected to pay up to $2 billion to settle a class-action suit by customers who said they were misled about the cost of their life insurance.
In the past, New Jersey insurance regulators have been criticized for showing leniency toward the company, one of the state's biggest employers.
In the life insurance case, Florida and other states were far more critical of Prudential and negotiated millions more in penalties and compensation from the company.
For decades, Prudential has had a close relationship with the state's political leadership. Several former governors and other political leaders have served on the board, including Raymond Bateman, a longtime legislator and the father of Christopher Bateman, the current chairman of the state assembly committee on banking and insurance. Gov. Christine Todd Whitman's husband, John, was a senior manager for a Prudential subsidiary from 1987 to 1990.
Pub Date: 6/18/98