When Arthur F. Ryan arrived at Prudential Insurance Co. at the end of 1994, the new chairman and chief executive found a company in something of a shambles. "The Rock" had just admitted its securities unit had sold limited partnerships fraudulently, which ultimately cost it $1.5 billion. Evidence was mounting of improper sales practices in its individual life insurance unit that by April had evolved into a multistate regulatory probe. Lawsuits were starting to proliferate. And its once-pristine reputation was badly tarnished. More broadly, Ryan faced a huge, unwieldy institution that was badly adrift. Its strategy was floundering, technology systems were outmoded, costs were bloated, market share was under pressure, and its financials were anemic.
A year and a half later, Ryan seems to be taking all the right steps to revitalize the nation's largest insurer. He has been working with regulators to resolve the life-insurance sales scandal. On July 9, Pru agreed to a multistate settlement plan with a $35 million fine, the biggest penalty ever levied on an insurer, and restitution for abused policyholders that could cost more than $1 billion. The next day, Ryan took out full-page newspaper ads to apologize for the "intolerable," deceptive sales practices. He has revamped the sales system, fired hundreds of agents and managers suspected of wrongdoing, and bolstered internal controls.
Ryan has also put in place a strategy to improve Pru's tepid performance. He has streamlined management, shed more than $1.4 billion worth of nonstrategic businesses, and instituted an $800 million annual cost-savings program. With almost $12 billion in capital at midyear, Prudential is positioned to absorb not only the cost of paying off policyholders for past sins but also is better able to stem a dip in its debt ratings and invest in the future. "I believe that a very large portion of the work to fix [the company] has been accomplished," says Ryan. "We are now able to focus more on how we are going to build."
WEAK FINANCIALS. Ryan's repair job won't be easy. His biggest challenge will be to fundamentally change the firm's culture. "This has been a company where the CEO could make a decision and some guy four layers down could derail it," says one Prudential insider.
The company's financials are still lagging. It earned a mediocre $579 million in 1995; Ryan is targeting a somewhat better $600 to $700 million this year. Still, "this organization should be earning in the range of $1.5 billion a year," says David A. Havens, Standard & Poor's director of insurance rating services. Pru is still underperforming other mutual insurers, says Lawrence G. Mayewski, an A.M. Best Co. senior vice-president. Using Ryan's 1996 earnings goal, Prudential's return on surplus or capital would be about 8%. That's up from 6.5% in 1995 but still below the 9.0% to 9.25% Mayewski expects for the industry in 1996. Mayewski, though, says Ryan has lifted Prudential's risk-based capital ratio--a measure of its insolvency cushion--which grew from 171% at the end of 1994, below the industry average, to an above average 235% at the end of 1995.
Ryan also must reverse some significant losses in market share. Take asset management. The giant has slipped to fifth place in assets in 1995, from second place just the year before, according to an Institutional Investor survey. And despite some paring, the Rock is still perceived as a mishmash of businesses--life insurance, property and casualty insurance, health care, securities brokerage, banking, as well as asset management. "Pru's in too many businesses. Art's gotten them out of some of the peripheral stuff, but in today's world, they have really got to focus more than they have," says Richard L. Huber, vice-chairman at competitor Aetna Life & Casualty Co.
By all accounts, Ryan's background would seem to equip him for the job. The Chase Manhattan veteran is no stranger to adversity. In 1990, Ryan was appointed president with a mandate to join new Chairman and CEO Thomas G. Labrecque in dealing with the bank's mammoth loan losses. They slashed costs and focused Chase on its strongest businesses. Ryan became known as "the gorilla" for his tough management style. When he left, in the words of a Chase banker, the bank had "a lot to walk down the aisle with" in its 1995 sale to Chemical Banking Corp.
QUICK STUDY. Brooklyn-born Ryan, 53, is a self-described "erratic" golfer. But the former chain smoker brings a direct approach to his new job. "He's very down to earth. There is no hidden political agenda," says Anthony P. Terracciano, a former Chase colleague and now president of First Union Corp. "He has a very informal style," says Chase alumnus Huber. "But at the end of the day, you deliver or you are history. That's unusual in any component of the insurance industry." Adds Prudential board member and former Merck & Co. CEO P. Roy Vagelos: "He's not blown over by tough problems." Fellow director and Princeton University professor Burton G. Malkiel calls Ryan "a fast study...who is very willing to make sweeping changes."
Among Ryan's most important initiatives is to build Pru's share of aging baby-boomers' savings. He hired Rodger A. Lawson, considered the architect of Fidelity Investment Co.'s successful marketing strategy of the 1980s, to lead Pru's marketing effort. Ryan also formed a new money management group with $200 billion in assets under management to consolidate mutual funds, individual annuities, guaranteed investment contracts, 401(k)s, and pension plans. Unit head E. Michael Caulfield, a respected Prudential veteran, says the group has a shot at being "the growth engine of the organization."
Ryan will keep Prudential Securities Inc. as a key part of his plan to accumulate savings assets despite Street gossip that the unit is for sale. "Art sees us as his distributor to higher net-worth individuals," says Hardwick Simmons, the CEO of Prudential Securities.
The CEO's efforts seem to be bearing fruit. In the first quarter, Prudential is off to a good start, with profits of $441 million. Ryan says projected 1996 profits of $600 million to $700 million should pass $1.1 billion in either 1997 or 1998. That includes an estimated 1996 restructuring charge of at least $800 million for cost cuts. But these projections do not include life-insurance restitution costs.
Prudential has made progress toward resolving its legal woes, but the job is not over. If the multistate settlement is accepted by policyholders and lawyers, who are currently insisting on major changes, the odds are the plan would largely resolve Pru's fraudulent sales practice allegations. Thirty-seven states plus the District of Columbia have agreed to let the plan be offered in their states. But 240 sales-practice related lawsuits, including 22 as yet uncertified class actions. There are another 21 suits by alleged whistle-blowers still in the works. Some of these could be potential land mines. In an arbitration case now before the National Association of Securities Dealers, two former Prudential Insurance managers charge they brought sales abuses to Ryan's attention but that their complaints were ignored, supporting documents destroyed, and that they were fired in retaliation. The company says the managers were dismissed for failure to supervise and says it expects to be fully vindicated.
Prudential director and former Federal Reserve Board Chairman Paul A. Volcker minimizes the outstanding liabilities. "Prudential has been under very close scrutiny," he says. "We are at the bottom of the problems, whatever happens to the legal suits."
Ultimately, Ryan will be judged on his ability to create an effective strategy. His plans, while more focused, are not unique. Every bank, securities company, and insurer wants to get its hands on baby boomers' wallets. Prudential has yet to capitalize on its strengths: a strong brand name, an enviable distribution system with 20,000 insurance agents and financial planners, 6,000 securities brokers, and millions of customers. As Volcker puts it, "He's got to move ahead now."