Prudential Financial Inc.
Prudential Financial Inc.
751 Broad Street
Newark, New Jersey 07102
Telephone: (973) 802-6000
Toll Free: (800) 346-3778
Fax: (973) 802-4479
Web site: http://www.prudential.com
Incorporated: 1873 as Widows and Orphans Friendly Society
Total Assets: $568 billion (2006)
NAIC: 524113 Direct Life Insurance Carriers; 524114 Direct Health & Medical Insurance Carriers; 524126 Direct Property & Casualty Insurance Carriers; 524298 All Other Insurance Related Activities; 525990 Other Financial Vehicles; 523930 Financial Planning Services
Prudential Financial Inc. is one of the largest diversified financial institutions in the world and, based on total assets, one of the largest insurance companies in North America. Along with its life insurance and annuities business, The Prudential Insurance Companies of America, the company also operates in asset management, securities brokerage, real estate brokerage, and relocation services. In 2001, Prudential completed the process of demutualization, by converting to public ownership; the company then adopted its current moniker. The company's assets in June 2006 were $568 billion.
19TH CENTURY ORIGINS
A Yale dropout named John F. Dryden established the forerunner of Prudential in 1873, naming it the Widows and Orphans Friendly Society. Two years later, influenced by the British Prudential Assurance Company, Dryden changed his company's name to The Prudential Friendly Society (the company settled on its current name in 1877). When Dryden visited British Prudential at this time, he was impressed by several key elements, including the British company's offering of low-cost industrial insurance for laborers; the fact that agents collected premiums each week from customers at home; and that the company served not the wealthy or middle class, but the working class. Unable to find backers in his native New England or New York to build the company he envisioned, Dryden crossed the Hudson to Newark, New Jersey, and convinced several Newark citizens to purchase $30,000 of capital stock.
The first prospectus of the company succinctly set forth its aims: Relief in sickness and accident for people of meager means, pensions for old age, adult and infant burial funds—all goals which corresponded closely to the needs of the diverse ethnic groups then immigrating to the United States. Yet the company's first directors failed to recognize Dryden's vision or organizational talents. As a result, Newark real estate broker Allen L. Bassett was installed as president. His tenure was shortlived, however, and Noah Blanchard, a tanner, took the helm. In 1881, when Blanchard died, the directors finally 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.
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 company's advertising department created Prudential's long-standing logo and slogan: the Rock of Gibraltar accompanied by the words, "The Prudential has the strength of Gibraltar." Both were chosen to express the solidity of the products the company offered. The company's image was further bolstered by the outcome of a New York state legislative committee investigation under Senator William W. Armstrong in 1905. While the major companies of the day became targets of the investigation into violation of customer interests, Prudential emerged relatively unscathed.
When Dryden died in 1911, his son, Forrest Dryden, followed him as president. Under Forrest's leadership, the company continued its rapid growth.
MUTUALIZING AND SURVIVING
However, control of the company became and remained a problem during Forrest Dryden's term. Its huge resources and conservative investment philosophy made Prudential's assets look appealing to potential purchasers. Tired of fending off corporate suitors and raiders, the board took its first steps to make the company mutual and sell the company to its policyholders.
Later in Forrest's tenure, World War I drained the company with its heavy claims. Then, as a result of the 1918–19 influenza pandemic, Prudential paid over $20 million for flu-related deaths. Shortly afterward, Forrest Dryden brought scandal to the firm because of a conflict of interest he had due to certain stocks he held. By the time he resigned in 1921, company totals exceeded $5.6 billion, an increase of $3.6 billion in ten years. Corporate assets rose from $259 million in 1911 to $830 million in 1922. Edward D. Duffield became Prudential's next president.
During Duffield's term, Prudential stayed much the same. While the company 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 a leader in the industry.
Franklin D'Olier followed Duffield as president. While D'Olier recognized the problems Prudential faced with its conservative managerial corps, he never succeeded in attending to them. A larger crisis demanded his attention: Hitler's actions in Europe and the U.S. commitment to World War II. D'Olier helped organize the New York regional civil defense and later served on the Strategic Bombing Survey Commission. However, in 1942, Prudential finally converted to a mutual company, completing the process started in 1915, and, in 1928, it entered the market for major medical coverage, group credit insurance, and group insurance in multiple employer-collective bargaining units. The group sales department was the brainchild of Edmund Whittaker, an actuary who had joined the company in 1928, and who conceived of actuaries as the "engineers of insurance."
A NEW ERA OF DECENTRALIZATION
In 1946 Prudential entered a new era. Carroll M. Shanks took office as Prudential's seventh CEO. At 40, he was the youngest president since Dryden. Shanks had joined Prudential in 1932 and was known for his unorthodox methods. During his 15 years as president, he remade the company, leading Prudential into a bold decentralization that stunned the industry.
Prudential Financial's distinctive rock logo and Prudential's name are among the most enduring brands in U.S. corporate history. The company's long history is a testament to the quality it has provided its customers. In addition to the level of service, Prudential Financial is today recognized for the breadth of products and services it provides and continues to be a recognized company of quality financial services at home and abroad.
Within months of Shanks taking office, resignations or early retirements were announced down to the level of middle management. Next, in 1948, he opened regional home offices across the nation, each with its own senior vice-president in charge and with total responsibility for the region. Newark retained the corporate senior officers, actuaries, and evaluation and staff departments, but each vice-president handled local sales, investments, general management, and issues from policy to claims.
The reorganization dealt with many of the company's problems. It attacked the excessive specialization that separated workers and stymied activity; 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 Prudential had arrived in style and strength. Quickly the regional home offices helped Prudential establish a new national presence. Corporate policy called for the regional office to invest its dollars in the local community. With the inception of each of the eight home regional offices, Prudential's sales jumped and investment income rose sharply. In 1948, the first regional sales office in Los Angeles boosted revenue in that region by 20 percent. Group pension sales totaled $44 million in 1945, and, by 1955, exceeded $194 million; group life sales exceeded $589 million in 1949, a record for both Prudential and the industry.
As regional leaders exercised their autonomy, they created a multitude of new products, many tailor-made to their regional markets. Shanks adapted the best innovations to the national scene. Prudential set up employee security programs that combined group life and health insurance. In addition, it changed major medical insurance in the 1950s when it revised the method for computing the deductible. The company also underwent internal change. In 1951 Prudential'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 also revised its investment strategies. Shanks consistently looked for niches where Prudential could risk a small amount yet increase its average return much above that of its competitors. In 1950 the Prudential began buying common stocks and, by 1964, had 3 percent of its assets in stock on which it realized $75 million in capital gains. The strategy was successful; by 1962, the life insurance industry averaged a return of 4.4 percent on all invested assets. Prudential averaged 4.7 percent, producing an additional $60 million in income for the company. After 1958, Prudential ceased to buy bonds in the market and instead negotiated separate loans with corporations for higher rates on which 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.
When Shanks retired in 1960, the Prudential board named Louis R. Menagh, Jr., as chief executive officer. At 68 one of the oldest to win the post, Menagh had worked his way to the top from a position as clerk. Menagh retired in October 1962, and the board named Orville E. Beal president. Beal had headed the regional home office in Minneapolis, Minnesota, and was committed to Shanks' bold vision.
- John F. Dryden establishes the Widows and Orphans Friendly Society.
- The company changes its name to The Prudential Insurance Company of America.
- Prudential's advertising department creates its long-standing Rock of Gibraltar logo.
- Prudential converts to a mutual company.
- Prudential surpasses the Metropolitan as the world's largest insurance company.
- The company enters the property and casualty insurance business.
- Hanbro Life Assurance Ltd. of Britain is acquired.
- Bache investment and brokerage house is purchased; George L. Ball is named chairman and CEO of Pru Bache.
- Ball resigns from Pru Bache as losses total more than $250 million amid lawsuits relating to selling real estate limited partnerships.
- Prudential is assessed a $35 million fine and forced to pay restitution to 10.7 million policyholders for its part in a churning scandal.
- The company completes the demutualization process and changes its name to Prudential Financial Inc.
- The U.S. operations of Skandia Insurance Co. Ltd. are acquired.
- Prudential buys Allstate Financial's annuity business.
In 1964, Beal led Prudential in selling its first group variable annuity policy. These annuities were invested entirely in common stocks and were thus a much more attractive hedge against inflation than prior annuities based on bonds, mortgages, and similar investments. In 1967, Prudential surpassed the Metropolitan as the world's largest insurance company; total Met assets amounted to $23.51 billion while Prudential announced $23.6 billion. In 1968, it established PIC Realty Corporation as a wholly owned subsidiary that owned and leased commercial real estate through joint ventures with established real estate developers. Prudential shared additional profits as a principal in real estate development.
Beal stepped down in 1968, the same year the company abandoned its original pay-by-the-week policies, closing an important chapter in the company's history. He turned his leadership role over to Donald MacNaughton, who led the company through some of its most expansive innovations. MacNaughton particularly addressed issues of corporate social responsibility. When Newark suffered terribly after one of the worst urban riots in U.S. history, MacNaughton pledged to use Prudential's resources to help with the problems of urban centers and gave $50 million to Newark. He convinced the insurance industry to pledge $1 billion in help to U.S. cities, an amount 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, well ahead of most of the competition. In 1969, Prudential celebrated total assets of over $25 billion; when MacNaughton retired in 1978 reported assets were $35.8 billion.
OPPORTUNITIES AMID INFLATION AND STAGFLATION
When the New Jersey legislature revised insurance laws in 1967, it broadened the operations of life insurance companies, permitting them to offer fire and casualty coverage, individual variable annuity plans, direct investment in real estate, investment management services, mortgage investing, and to own or lease business or communication equipment. Prudential took advantage of these new opportunities; inflation was corroding the paychecks of U.S. workers and fewer customers wanted policies that pledged fixed payments. Instead Prudential aimed its sites at the new middle-class consumer, aiming to meet all their insurance needs.
In 1970 Prudential entered the property and casualty insurance business. Unable to secure the necessary state licenses, and without a sufficiently large body of trained and certified agents, the company contracted with Kemper Insurance to provide "shell" companies in 26 states. Homeowners insurance policies had traditionally been written for three to five years, and corporate profits suffered from inflation. Instead, Prudential wrote all its policies at current rates. To minimize losses, it carefully selected the geographic regions it entered. However, the retraining costs of certifying 30,000 agents were great. By 1972, Prudential dropped its contract with Kemper and continued in the casualty and fire field through its subsidiary Prudential Property and Casualty Insurance Company.
MacNaughton continued the search for higher returns in a period of inflation and stagflation. In 1973 Prudential formed Prudential Reinsurance Company, 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 percent and returned 16 percent on equity. Prudential Reinsurance gave Prudential its first entrance into the international market.
In 1976 Prudential acquired Hanbro Life Assurance Ltd. of Britain and entered the European Common Market. 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 by Robert Beck, who had joined Prudential in 1951 as an agent. Beck attacked the problem of the continuing lapse rate on life insurance policies by entering new markets. The company formed Dryden and Company and Gibraltar Casualty Company to sell coverage of unusual and difficult insurance risks to the surplus lines market. Prudential 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 Japan. 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. With Bache, Prudential could sell money market funds, mutuals, tax shelters, real estate partnerships, as well as stocks and bonds, all hedges against inflation. Prudential-Bache hired George L. Ball, former president of E.F. Hutton & Company, as its chair and CEO. Ball, a Wall Street star known for his aggressive and innovative tactics as a broker, led the brokerage firm on an expensive, but ultimately failed effort to break into the top levels of Wall Street investment banks for the next nine years.
UNPRECEDENTED GROWTH AND SCANDAL
Throughout the 1980s, Prudential continued to search for ways to maximize income from its investments. In 1981, the company formed Property Investment Separate Account, a vehicle to enable pension funds to invest in real estate. It also developed several successful investment initiatives: SMALLCO invested in firms under $200 million, and MIDCO in firms between $75 and $460 million in capital. Beck led Prudential in a continued effort to diversify, opening health maintenance offices in Oklahoma; Atlanta, Georgia; and Nashville, Tennessee. New life insurance subsidiaries were formed in Texas, Arizona, and Illinois. The company also 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, the company took time to evaluate and integrate the gains of earlier years. A new corporate strategy needed to be articulated to make sense out of the period 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. That year, it acquired Merrill Lynch Realty and Merrill Lynch Relocation Management and offered customers a nationwide system of real estate brokers. Prudential 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 and marked at least a temporary end to runaway leveraged buyouts (LBOs) and massive mergers and acquisitions. The managers at Prudential had made millions for the company in the heady days of LBOs. From one financial package put together to help sell a company, Prudential 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 Prudential crafted were initially tax havens for its customers. When the 1986 tax reform act eliminated the rationale for the many tax shelters, customers quickly abandoned them. In addition, the packages designed by the financiers were often so sophisticated that neither the customers nor the agents marketing the devices could understand them, and many of the innovations tried by Prudential faltered. Prudential pumped $2.4 billion into Bache Group, for example, with continual losses. In 1989, a difficult year for Prudential, Bache lost $48 million. In November 1990, Prudential-Bache announced that it was cutting back on its investment banking operation by about two-thirds, having made the decision to reorganize the firm to focus on its strengths in the retail brokerage business. In early 1991, with losses totaling more than $250 million and amid lawsuits relating to selling real estate limited partnerships, Ball resigned. Hardwick Simmons, former president of Shearson's Private Client Group, took over leadership of Prudential Securities Inc., renamed as part of its restructuring.
During Simmons's first year in charge of Pru Securities, the firm launched an aggressive ad campaign and enjoyed record earnings. In 1993 profits reached nearly $800 million. Yet Simmons had also to deal with the private lawsuits of angry investors who had lost hundreds of millions of dollars in limited partnerships sold by Pru Securities brokers, several potentially damaging class action suits, and an SEC investigation. The cause of his trouble: some $6 billion of limited partnerships sold in the 1980s to more than 100,000 investors valued at only a fraction of their original selling price. In response to the negative publicity, Prudential retreated behind a shield of secrecy, but with probes into the limited partnerships by state securities regulators expanding, the company accepted various settlements, including public censure in 1992. Prudential remained under scrutiny for the next several years for "churning," inducing policy holders to trade up to more expensive policies without explaining the costs. The investigation, concluded in 1996, and involving regulators from 45 states, assessed Prudential a $35 million fine and set up a restitution plan for 10.7 million policyholders. The settlement, approved by a New Jersey district court judge in 1997, led to an eventual payment in excess of $2 billion.
The problems at Prudential Securities coincided with a downturn in profits for the brokerage firm. Profits at Prudential Mortgage dropped, too, with a decline in mortgage lending activity and a rise in interest rates. Sales of life insurance to individuals diminished as well. Prudential's reinsurance business and property and casualty units had been hard hit by several natural disasters, including Hurricane Andrew. In 1994 insurance operations lost $907 million as a result of the Northridge, California, earthquake. The board took advantage of Winters's retirement in late 1994 to bring in new "outsider" management in an attempt to resolve its problems. Arthur Ryan came from Chase Manhattan, where he had overseen the marketing of mutual funds and insurance. Before that, he had led a large sales operation at Control Data. With $300 billion in assets, Prudential also began to take steps to boost efficiency, bringing in Coopers & Lybrand, McKinsey, Deloitte & Touche, and other consultants. It announced plans to shed its reinsurance and mortgage units and to liquidate its $6 billion real estate portfolio. Real estate divestitures began in 1997 with the sale of the company's property management unit and its Canadian commercial real estate business. The following year, it sold Prudential Center complex in Boston.
THE MOVE TO GO PUBLIC IN 2001
In 1998, Ryan went before New Jersey's insurance commissioner to lobby for passage of a law that would allow a mutual insurance company to sell shares to the public. Under Ryan's plan, the company would change its corporate structure so that it could raise money by selling stock. Detractors of the plan, such as the insurance director for the Consumer Federation of America, argued that it would enrich management via stock options, while causing policyholders to lose out in the form of lower dividends. In 1999, in preparation for becoming a stock-owned firm, Prudential undertook another reorganization, dividing its businesses into international, institutional, and retail units. The firm's life, property/casualty, mutual fund, and investment products fell within the retail unit, while group life, 401(k) and other employee benefit products became part of the institutional unit.
To focus on insurance and financial products, Prudential divested some of its business, including healthcare operations, which it proposed to sell to Aetna for $1 billion. In late 1998, it had announced its intention to pull out of unprofitable Medicare markets, dropping coverage for about 20 percent of its seniors in the SeniorCare program by refusing to renew Medicare-risk contracts in northern and southern California; Maryland; Washington, D.C.; New York; New Jersey; and parts of Florida. Also in 1999, Prudential began rapid global expansion; early that year, it opened a mutual fund company with Mitsui Trust & Banking Co. in Japan, acquired a license to open an office in Poland, and launched new insurance companies in Argentina and the Philippines.
Prudential ranked as the largest life insurer in terms of assets in the United States in 1998. It placed second in net premiums written that year and occupied sixth place in annuity sales during the preceding three years. About 55 percent of the company's earnings came from the sale of insurance, which grew by 21 percent in 1998, while 45 percent came from its investment and securities businesses. As it approached the 21st century, Prudential faced competition not only from a host of domestic giants, including Citigroup, MetLife, and Merrill Lynch, but from the overseas financial service titans as well.
PRUDENTIAL IN THE NEW MILLENNIUM
The company completed its demutualization process in 2001. Prudential went public on the New York Stock Exchange and launched one of the largest public offerings ever in the industry on December 13 of that year. The IPO raised more than $3 billion. At this time, the company adopted the Prudential Financial Inc. moniker, making The Prudential Insurance Company of America one of its subsidiaries.
Meanwhile, Prudential remained busy on the acquisition front. In 2000, it gained full ownership of Prudential-Mitsui Trust Investments Co., its joint venture with Mitsui Trust & Banking. It also strengthened its foothold in the auto insurance market with the purchase of THI Holdings Inc., and set plans in motion to purchase an interest in Japan's Kyoei Life Insurance Company Ltd. In 2002, it acquired a 50 percent stake in Oppenheim Funds Trust GmbH and Oppenheim Investment Management International.
Prudential made several divestitures at this time as well. It sold its personal automobile and homeowners lines to Liberty Mutual Group Inc., and its brokerage division to Wachovia Securities. Prudential retained a 38 percent stake in Wachovia Securities, which became the third-largest brokerage firm in the United States after the deal.
The company restructured operations in the early years of the new millennium, focusing on three main divisions: Insurance, Investments, and International Insurance and Investments. It also pledged to cut nearly $600 million in expenses and achieve 12 percent return on equity (ROE)—a measure used to analyze operating performance—by 2005. In addition, Prudential continued to seek out strategic acquisitions that would increase its competitive advantage. In 2003, the company added the U.S. operations of Skandia Insurance Co. Ltd. to its arsenal in a $1.2 billion deal that secured its position as one of the top ten annuity companies in the United States. One year later, it added Cigna Corp.'s retirement and investment products division to its portfolio. In 2006, Prudential acquired Allstate Financial's variable annuity business for $591 million. The company stood as the third-largest provider of adviser-sold variable annuity products in the United States upon completion of the purchase.
With revenues and profits on the rise, Prudential's actions over the past several years appeared to have paid off. The company achieved 12.4 percent ROE in 2005, exceeding its goal set back in 2001. Arthur Ryan was firmly at the helm of Prudential as chairman, CEO, and president and the company remained optimistic about its future, believing it was on the path to success in the years to come.
Thomas J. Heed
Updated, Carrie Rothburd; Christina M. Stansell
Insurance; Investment; International Insurance and Investments.
AXA Financial Inc.; Citigroup Inc.; MetLife Inc.
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