The Prudential Insurance Company of America

The Prudential Insurance Company of America

751 Broad Street
Prudential Plaza
Newark, New Jersey 07102
U.S.A.
(201) 802-6000
Fax: (201) 802-3128

Mutual Company
Incorporated: 1875 as Widows and Orphans Friendly Society
Employees: 105,000
Assets: $163.97 billion

The Prudential Insurance Company of America is the largest insurance company in North America and one of the largest financial institutions in the world. Along with its primary business, insurance, it also operates in securities, investments, residential real estate, employee benefits, home mortgages, and the corporate relocation industry. Prudential provides a broad array of diversified financial services for individuals, groups, and institutions: life, health and disability insurance, annuities and IRAs, estate or financial planning services, mutual funds, security and commodity services, liability insurance, home equity and mortgage services, real estate brokerage, deposit and personal management accounts, and credit card services.

Prudential started business as the Widows and Orphans Friendly Society in 1873 and in two years changed the name to The Prudential Friendly Society. Two years later the name became The Prudential Insurance Company of America. John F. Dryden, the founder of Prudential, studied the activities of the British Prudential Assurance Company, which was offering industrial insurance to workers. Several key elements marked this major innovation in life insurance; one, it only cost pennies a week; two, it protected against lapses in the account by having agents visit the customers at home each week to pick up the premium; three, it was tailored not to the wealthy or middle class but to the workers in industry and commerce. It was not easy to start such an innovative venture in 1875. The severe 1873 depression and the labor disorders of the period made investors wary of new ventures. Unable to find backers in his native New England or in New York, Dryden crossed the Hudson to Newark, New Jersey, and convinced several Newark citizens to purchase $30,000 of capital stock.

The first prospective of the company succinctly set its aims: relief in sickness and accident for people of meager means, pensions for old age, an adult burial fund, and an infant burial fund. The diverse ethnic groups coming to the United States shared a desire to provide a respectful, dignified burial for their loved ones. Dryden’s goal met the immigrants’ cultural need.

In the earliest years of the company the directors failed to recognize Dryden’s vision or organizational talents. As a result he was passed over for president, and Allen L. Bassett was installed. However, Bassett, a real estate broker in Newark, soon had a falling out with the directors. Noah Blanchard, a tanner in Newark, took over as president. As the depression of the 1870s lengthened, Metropolitan Life Insurance (Met), the industry leader, suffered as many customers cancelled their ordinary life policies. In a defensive reaction, in 1879, the Met offered industrial insurance and pirated the Prudential’s best agents. In reaction The Prudential (Pru) opened offices to sell industrial policies in New York. Decades of fierce competition followed. In 1881 Noah Blanchard died, and finally the directors elected John Dryden president by one vote. He served in that position for 30 years. During those years he led Prudential to several major innovations and established a corporate culture that marked Prudential for generations in the future.

Under Dryden’s leadership Prudential enjoyed explosive growth. In 1885 it reported 422,671 policies in force, by 1905 it had 6.49 million. Assets grew from $1.03 million in 1885 to $102.38 million in 1905. Prudential expanded to neighboring states, and in 1909 opened its first international branch in Toronto, Canada.

In 1896 the advertising department created one of the United States most memorable and durable logos. The Rock of Gibraltar plus the slogan, “The Prudential has the strength of Gibraltar,” became familiar to millions of Americans across the generations.

In 1905 a New York state legislative committee under Senator William W. Armstrong opened investigations into the insurance industry with Charles Evans Hughes as chief investigator. The major companies of that day were targets of the investigation into violation of customer interests. The Prudential emerged relatively unscathed.

When Dryden died in 1911, his son Forrest Dryden succeeded to the presidency. Under Forrest’s leadership the company continued its rapid growth. In 1911 insurance in force totaled $2 billion. In 1921, when he resigned, it exceeded $5.6 billion. Corporate assets rose from $259 million to $830 million in 1922.

Control of the company became a problem during Forrest Dryden’s term. With such huge resources and a conservative investment philosophy in a day of wild financial dealing, Prudential assets looked appealing to potential purchasers. Tired of fending off corporate suitors and raiders, the board took the first steps to make the company mutual and to sell the company to its policyholders.

Later in Forrest’s tenure the company suffered several setbacks. World War I drained the company with heavy claims. Then, as a result of the 1918-1919 influenza pandemic, Prudential paid out over $20 million for flu-related deaths. Shortly afterward Forrest Dryden brought scandal to the firm. During a legislative investigation into the insurance industry Forrest appeared ignorant about the most basic operations of the firm and did not satisfactorily explain a conflict of interest he had with certain stocks he held. In 1921 he resigned from Prudential, and Edward D. Duffield became president.

During Duffield’s term Prudential experienced little growth. While it innovated by offering group insurance coverage to home office staff in 1924 and started group health in 1925, the Great Depression strangled most growth. Mortgages valued at $1.5 billion in 1931 bottomed at $787 million in 1935, even though the value of policies in force grew $1.5 billion between 1930 and 1935. In 1938, when Duffield died suddenly, he left a company still tremendously successful but no longer an exciting leader in the industry.

Franklin D’Olier succeeded Duffield as president. He concluded that deadwood littered the managerial ranks of the Pru. Privately he told his family that he would no longer urge young, ambitious men to join the Prudential family; seniority so dominated corporate policy that creativity and efficiency suffered.

While D’Olier recognized the problems Prudential faced with its conservative managerial corps he could never attend to them. A larger crisis commanded his tour of duty at the Pru. Hitler’s actions in Europe and the U.S. commitment to World War II drew more and more of D’Olier’s attention. The government repeatedly called on D’Olier to help with the war efforts. He helped organize the New York regional civil defense and later served on the Strategic Bombing Survey Commission.

Two major lights illuminated Prudential during the war. First, in 1942 the Pru finally converted to a mutual company, a process started in 1915. Second, Prudential benefited from the talents of Edmund Whittaker, who had joined the company in 1928, when D’Olier feared the Prudential was about to run out of actuaries. Whittaker moved rapidly through the ranks and, as head of group sales, helped Prudential seize the forefront in developing group sales. He led Prudential into major medical coverage, group credit insurance, and group insurance in multiple employer collective bargaining units. He typified the young executives who shortly would remake Prudential and the industry. When Whittaker characterized actuaries as the “engineers of insurance,” he explained his own successes. In a speech to Prudential agents, reported in William Carr’s For Three Cents a Week, Whittaker told them to look beyond the next premium. “We who are trying to compete with the ideas of nationalized programs are required to be social engineers. So far we have been good salesmen and good managers. We have not measured up too well as social engineers. If we don’t do better, our system of private enterprise will pass by default to social planning.”

In 1946 Prudential entered a new era. Carroll M. Shanks took office as Prudential’s seventh chief executive officer. He did more to energize and remake the company than all the men since Dryden. At 40 years of age, he was the youngest president since Dryden, the man he most resembled. Shanks had joined Prudential in 1932 and was known for his unorthodox methods. During his 15 years as president he remade the company. He led the company into a bold decentralization that stunned the industry. He developed a parade of new products. He adopted innovative investment strategies that won a significant advantage for Prudential and its customers, and set up a personnel system that became the talent bank of the industry.

Shanks knew how stultifying the seniority system was and believed that only massive pruning would save the company. Within months of his taking office, resignations or early retirements were announced down to the level of middle management. Orville Beal, a future president of Prudential and one of the first to be promoted by Shanks, recalled those days in Carr’s From Three Cents a Week. “The change was electric. Prudential held great possibilities, great potential, which was not yet realized.... We didn’t blaze many trails in the insurance industry before Shanks took over.... He shook up the organization.... He got us going again.”

In mid-1945 he drastically reorganized the Pru with massive decentralization. Shanks opened regional home offices across the nation. Each new regional home office would have its own senior vice president in charge and with total responsibility for the region. He would operate as president of a small company. He would handle most areas—sales, investments, general management, and all issues from policy to claims. Newark would retain the corporate senior officers, actuaries, and evaluation and staff departments. The reorganization dealt with many of the problems in Newark. It attacked the excessive specialization that separated workers and produced indecision; it cut the many levels between the president and operating employees; it eliminated layers of red tape and provided new opportunities for energetic and creative managers.

Each regional home office occupied a striking modern office building that dominated its city and told the region that the Pru had arrived in style and strength. Quickly the regional home offices, the first opened in Los Angeles in 1948, helped Prudential establish a new national presence. Policy called for the regional office to invest its dollars in the local community. With the advent of each of the eight home regional offices, Prudential sales jumped and investment income also rose sharply. In the first year regional sales in Los Angeles went up 20%.

The regional home offices enabled Shanks to freeze out inert executives. As the new leaders trained in the regional home offices spread out across the land, they created a multitude of new products, often tailor-made to the particular markets of their region. Quickly Shanks moved them to the national scene. The Prudential earned more on its investments. In 1962 the life insurance industry averaged a return of 4.29% on all invested assets, while the Prudential averaged 4.65%, producing an additional $60 million for the Prudential.

The creative spurt that Shanks excited extended to almost all products. Group pensions sold $44 million in 1945 and by 1955 exceeded $194 million; group life sales exceeded $589 million in 1949, a record for both Pru and the industry. The Prudential set up employee security programs that combined group life and health insurance. The Pru changed major medical insurance in the 1950s when it revised the method for computing the deductible. In 1951 the Pru’s district agents voted to go on strike, the first formal job action by a white collar union in the nation. The American Federation of Labor led the workers for three months as they negotiated for improvements and succeeded in obtaining recognition of the union as their bargaining agent.

Under Shanks Prudential revised its investment strategies. After 1958 the Pru ceased to buy bonds on the market and instead negotiated separate loans with corporations for higher rates, while the corporations received more rapid, less costly, and more flexible financing. In 1956 Shanks created a commercial and industrial loan department to seek out small business loans.

Shanks consistently looked for niches where the Prudential could risk a small amount yet increase its average return significantly above its competitors. For instance, in 1950 Prudential began buying common stocks after permissive legislation opened up this opportunity. In 1964 Prudential had 3% of its assets in common stock and realized $75 million in capital gains.

When Shanks retired in 1960 the Prudential board named Louis R. Menagh Jr. as chief executive officer. At 68 he was one of the oldest to win the post but also the first to work to the top after starting as the lowest clerk. Menagh retired in October 1962, and the board named Orville E. Beal president. Beal exemplified the personnel advantages of decentralization. During the years he headed the regional home office in Minneapolis, Minnesota, he dealt with the diverse issues that he then faced in Newark. As a result, he was willing and able to pursue Shanks’s bold vision.

In 1964 Prudential sold its first group variable annuity policy. Those annuities were invested entirely in common stocks and were seen as a much more attractive hedge against inflation than prior annuities, usually based on bonds, mortgages, and similar investments. In 1967 Beal announced that Prudential had finally surpassed the Metropolitan as the world’s largest insurance company. The Met announced total assets of $23.51 billion while the Prudential announced $23.6 billion.

One of the great strengths of Prudential, from the earliest Dryden days, was its service to customers across the broadest possible economic range. The company sold industrial insurance to blue collar workers and offered ordinary life policies to white collar workers. With increases in worker income it was no longer necessary to market industrial policies featuring weekly premiums. In 1968 Beal abandoned the Pru’s last pay-by-the-week policies, closing an important chapter in the company’s history.

In 1968 Prudential established PIC Realty Corporation as a wholly owned subsidiary that would own or lease commercial real estate through joint ventures with established real estate developers. The Prudential would share profits directly as a principal in real estate development.

Beal stepped down in 1968. He turned the keys over to Donald MacNaughton, who led the company through some of its most expansive innovations. He particularly addressed issues of corporate social responsibility. In July 1967 Newark suffered terribly after one of the worst urban riots in U.S. history. Prudential was especially vulnerable, located in downtown Newark. Employees were afraid to go to work; middle managers resisted moving to the region. MacNaughton pledged to use Prudential’s resources to help with problems of the urban centers. One of his first acts as president was to pledge $50 million to Newark. He helped the insurance industry pledge $1 billion to help U.S. cities, later increased to $2 billion. In his nine years as CEO, MacNaughton developed an array of new products for the company and plunged it into the international marketplace ahead of most of its competition. In 1969 Prudential celebrated total assets of over $25 billion; when MacNaughton retired in 1978 reported assets were $35.8 billion.

The New Jersey legislative revision of insurance laws in 1967 broadened the operations of life insurance companies. Henceforth they would be permitted to offer fire and casualty coverage, individual variable annuity plans, direct investment in real estate, investment management services, mortgage investing, and owning or leasing business or communication equipment. The Prudential took advantage of these new opportunities. MacNaughton knew that several trend lines boded ill for the life insurance industry; with inflation corroding the pay checks of U.S. workers, each year fewer customers saw great value in policies that pledged fixed payments. Life insurance assets grew 87% between 1950 and 1960 but between 1970 and 1980 grew only 70%. MacNaughton knew that one of Prudential’s greatest asset was its corps of agents, who needed new products to sell. His vision was to provide the new middle class consumer with all insurance needs at one stop.

In 1970 Prudential entered the property and casualty insurance business. Unable to secure all the necessary state licenses and without a sufficiently large body of trained and certified agents, Prudential contracted with Kemper Insurance. Kemper provided “shell” companies that enabled Prudential to set up business in 26 states. Analysts at the time saw the arrangement as an astute move for the Pru. Homeowners insurance policies were often written for three to five years, and corporate profits suffered from inflation. Prudential wrote all its policies at current rates. The Pru carefully selected the geographic regions it would enter to minimize losses. However, the retraining costs to certify 30,000 agents were great. By 1972 Prudential dropped its contract with Kemper and continued in the casualty and fire field through its holding company subsidiary, Prudential Property and Casualty Insurance Company.

MacNaughton continued the search for higher returns in a period of inflation and stagflation. In 1973 the Pru formed Prudential Reinsurance Company (PRURE), insuring other insurance companies against extraordinary losses. In 1974 Prudential purchased CNA Nuclear Leasing, renaming it Prudential Lease. In its first year contracts grew by 88% and it returned 16% on equity. PRURE gave the Prudential its first entrance into the international market. The global commercial reinsurance business was virtually unregulated, and PRURE could be run easily with minimal administrative costs. MacNaughton felt strongly about the Prudential’s need to go multinational. Quoted in Business Week, February 9, 1976, he stated, “This organization cannot continue to be a successful domestic company if it doesn’t know a hell of a lot more about what’s going on abroad than it does now. If we get so that we don’t understand multinational business, then multinational business will eventually find someone else who does.”

In 1976 Prudential acquired Hanbro Life Assurance Ltd. of Britain. It was Prudential’s vehicle to enter the European Common Market, since the Pru expected that all member state insurance companies would soon be permitted to operate in all member states. MacNaughton developed many more product lines between 1973 and 1978. PIC Realty Canada, Ltd. owned and developed property in Canada. Prudential Health Care Plan operated health maintenance organizations. Pru Capital Management provided administration and management services to Prulease. Le Rocher, Compagnie de Reassurance wrote reinsurance in Europe. Pru Funding offered long term loans and operation leases for Prulease. Pru Supply contracted to supply fossil fuels or other inventories. Prudential General Insurance Company provided group casualty and property protection, and Pru Service Participacos, a wholly owned Brazilian subsidiary, provided services to another Brazilian property and casualty company.

MacNaughton retired in 1978 and was succeeded as CEO by Robert Beck. Beck joined Prudential in 1951 as an agent. During Beck’s tenure the lapse rate on life policies continue to grow. The Pru had always relied on the assets accumulated from whole life sales to fuel the growth of assets. Beck needed to find new sources to replace those lost to the decline in whole life policies. Beck attacked the problem by entering new markets. The company formed Dryden and Company and Gibraltar Casualty Company to sell to the surplus lines market the coverage of unusual and difficult insurance risks. Pru also formed additional subsidiaries to market group and commercial property and casualty insurance. In 1979 Prudential signed with Sony Corporation to form Sony-Prudential to sell life insurance in the Japanese market. Beck also led Prudential in another investment opportunity; PRUCO formed a subsidiary, P.G. Realty, to purchase, sell, and operate farmlands in Nebraska. Later other subsidiaries were formed to operate farm lands in Florida.

Beck’s most controversial acquisition came when he purchased the Bache investment and brokerage house in 1981. Bache was to be a troubled acquisition in a specialized industry new to the company. The Prudential now could sell money market funds, mutuals, tax shelters, real estate partnership, as well as stocks and bonds, all hedges against inflation. With Merrill Lynch selling life insurance, Citibank selling group life insurance through its credit cards, and American Express owning its own insurance companies, Prudential felt obliged to respond. Yet customers saw each of the various functions differently and ultimately did not trust the wisdom of a single adviser, seeing conflicts of interest.

Prudential continued to search for ways to maximize income from investments. In 1981 the company formed Property Investment Separate Account, a vehicle to enable pensions funds to invest in real estate. Pru developed successful investment initiatives: SMALLCO invested in firms under $200 million, and MIDCO in firms between $75 and $460 million capital.

Under Beck the Prudential continued to diversity, opening health maintenance offices in Oklahoma; Atlanta, Georgia; and Nashville, Tennessee. New life insurance subsidiaries were formed in Texas, Arizona, and Illinois. These new insurance companies did not need to rely upon whole life policies to accumulate capital. The company formed the Mircali Asset Management firm to manage global investments for other institutions.

In September 1986 Robert Beck retired. His successor as CEO and chairman of the board, 54-year-old Robert C. Winters, had joined Prudential in 1953. Winters took over after several decades of unprecedented growth in the company. Prudential’s assets had more than doubled since 1978. After many years of spinning off a seemingly endless line of subsidiaries and holding companies, Winters saw his tenure as a time to digest and rationalize the gains of the earlier years. A new corporate strategy needed to be articulated that made sense out of the recent spate of expansion, one that gave form to future plans.

In 1987 the company reorganized its Prudential Realty Group into four new firms: Prudential Property Company, Prudential Acquisition and Sales Group, Prudential Mortgage Capital Company, and the Investment Service Group. Prudential offered its customers virtually every variety of insurance known, both for individuals and groups; it offered property and casualty insurance as well as residential mortgages. Under Winters it acquired Merrill Lynch Realty and Merrill Lynch Relocation Management and offered customers a nationwide system of real estate brokers. Pru sold its shares in Sony-Prudential to Sony. It formed a Prudential Life Insurance Company Ltd. in Japan, which offered a full range of individual life policies. Other subsidiaries were formed or acquired to sell policies in Spain, Italy, South Korea, and Taiwan.

The October 1987 panic on the market cost Prudential $1 billion in paper value, but it also marked the end to runaway leveraged buy-outs (LBOs) and massive mergers and acquisitions. The managers at the Pru made millions for the company in the heady days of LBOs. From one financial package put together to help sell a company, the Pru earned $200 million on an investment of $650 million.

There was, however, a negative side to the boom years of the market. Many of the sophisticated financial packages the Prudential and others crafted were tax havens for the customers. When the 1986 tax reform act eliminated the rationale for the many tax shelters, they were quickly abandoned by customers. Also, the packages designed by the financiers were often so sophisticated that neither the customers nor the agents marketing the devices could understand them. Many of the innovations tried by Prudential and others continued to falter. The Prudential pumped $2.4 billion into Bache with continual losses. In 1989, a difficult year for the Pru, Bache lost $48 million.

When Prudential started in business in 1870s, it faced fierce competition with the Metropolitan and other insurance companies. As it approaches the 21st century it faces a new kind of competition and a very difficult competitive world. Under President Joseph Melone, as it sets its strategy to enter the financial services industry, it not only enters competition against U.S. giants such as American Express, Sears, General Electric Credit Corporation, PrimeAmerica, and Merrill Lynch, but also faces fierce competition from overseas financial-service titans.

In 1990 Ronald D. Barbero was elected president to replace Joseph Melone, who left after six years in that office. The Pru sees its future focused around products that are tailored to the needs of newly sophisticated financial consumers. It has made a great success out of its guaranteed income contract that remakes the way the middle-class consumer looks at income investments. It is building a new service industry around its acquisition of Merrill Lynch’s real estate business. Its agents will have ready access to consumers as they execute the largest purchase of their lives. Pru will not only offer mortgages, appraisal services, title insurance services, home equity loans, loans to furnish new homes, and homeowner’s life and casualty insurance, but will also offer industrial relocation services.

Principal Subsidiaries

Gifford Fong Associates, Inc.; Merrill Lynch Mortgage Corporation; PIC Realty Canada, Ltd,; PRUCO, Inc.; PRICOA International Bank, S.A. (Luxembourg): The Prudential Life Insurance Company, Ltd. (Japan); AMODA, Sdn. Bhd. (Malaysia, 40%); HSG Health Systems Group Limited (Canada); Jennison Associates Capital Corp.; PRICOA Vita S.p.A. (Italy); PRUCO, Inc.; PRUCO Life Insurance Company; Premisys Real Estates Services, Inc.; PRUCO Life Insurance Company of Illinois; Prudential Fund Management Canada Ltd.; Prudential of America General Insurance Company (Canada); Prudential Overseas Funding Corporation N.V. (Netherlands Antilles); U.S. High Yield Management Company; Prudential Realty Securities II, Inc.; Prudential Special Equity Fund (Luxembourg, 47%); PruServicos Participacoes, S.A. (Brazil); Tesser-act Corporation; The Prudential Insurance Company of Korea, Ltd.; The Prudential Insurance Company of New Jersey; The Prudential Investment Corporation; The Prudential Life Insurance Company of Arizona; The Prudential Real Estate Affiliates, Inc.; Prudential Mutual Fund Management, Inc.

Further Reading

Fifty Years the Prudential: The History of a Business, Charged with Public Interest, Newark, New Jersey, The Prudential Insurance Company of America, 1927; Sheehan, Robert, “That Mighty Pump, Prudential,” Fortune, January 1964; Carr, William H.A., From Three Cents a Week... The Story of The Prudential Insurance Company of America, Englewood Cliffs, New Jersey, Prentice Hall, Inc., 1975.

—Thomas J. Heed