How Much Prudence Is Good For Prudential?

The roaring '80s galvanized many financial institutions, but few with such a jolt as the Prudential Insurance Co. of America. The nation's largest insurance concern catapulted beyond the somnolent realm of mutuals into virtually every corner of the financial universe: investment banking, credit cards, mortgages, home sales.

The Pru transformed itself into an entrepreneurial crucible, where people with innovative ideas were encouraged to set up new business units. Sweeping aside its stodgy culture, the Newark (N. J.)-based giant lured hotshot Wall Street types across the Hudson River and paid them lush salaries to do wonders with its cornucopia of funds. The insurance megalith grabbed significant chunks of the last decade's flashiest corporate buyout and real estate deals. It pushed into new frontiers, like "underinsured" East Asia and Southern Europe.

These days, unfortunately, the fates feel a need to punish 1980s boldness. A sickening number of the insurer's deals have run into trouble--Macy's ($811 million invested), Carter Hawley Hale ($344 million), E-II ($87 million). Investment losses forced the Pru to slice dividends to policyholders by 7% in 1991 and 4% in 1992. Worse, in January, the Pru lost its coveted top rating from Moody's Investors Service Inc., bumping down a notch to Aa1. In 1990, its investment bank, then called Prudential-Bache Securities Inc., took a hellacious pratfall, running up $259 million in red ink and suffering lawsuits from thousands of angry limited partnership investors. Archrival Metropolitan Life Insurance Co. has overtaken the Pru in total life insurance in force.

`PUSHED BOTH WAYS.' This rude turn of events has provoked a profound internal debate over the best strategy for the Pru during the 1990s. At the center of the debate is Chairman Robert C. Winters, a methodical fellow whose training as an actuary inclines him temperamentally toward old-style mutual-insurer thinking. He believes that the 116-year-old Pru needs to pause for retooling and move back to its traditional cautiousness. Until such basic dilemmas as problem loans are resolved, he feels, intrepid ventures make little sense. Yet more aggressive staffers argue that the company should keep striking out in fresh directions. "I get pushed both ways," says Winters, who succeeded the more hard-charging, expansion-minded Robert A. Beck in 1987. "But these times call for careful management, and this is bound to disappoint the bold."

The Pru under Winters is a case study on how to redirect a behemoth institution, curbing excesses without squelching the healthy entrepreneurial spirit developed over the past few years. Winters knows he must walk a fine line. Too much caution can foster a complacency that proves deadly over the long run. "While we're digesting the changes of the past," he says, "we need to continue looking for growth." Indeed, there are even reports, denied by both sides, that the Pru is talking to General Electric Co. about acquiring GE's Kidder Peabody & Co.

Thus far, Winters' strategy appears to be working. While sour 1980s deals remain worrisome, the Pru has maintained its standing as the industry's asset champ, with $148 billion worth. And its capital--or net worth, the best measure of insurer performance--surged in 1991, far outpacing big competitors' and making up for a blah 1990 (charts).

SCOUT'S HONOR. Helping this is the long-term outlook inherent in the mutual setup, whereby its 12 million policyholders technically own the company, meaning the Pru has no stockholders eager for ever-rising quarterly returns. In addition, debilitating internecine warfare is unknown at the Pru, where there's a deeply ingrained culture of collegiality known internally as "Prudential polite."

That's sacred to Winters, who labors hard at keeping the work environment pleasant. He has written a Boy Scout-like code of conduct that employees should embody, including respecting each other. "Prudential is a far happier place to work than elsewhere," says James W. Stevens, who served at Citicorp and Dillon, Read & Co. before becoming an executive vice-president of the Prudential's investment arm in 1987. At one point, after a rare public display of temper at an executive, Winters took the podium at a company gathering and apologized to him. Another time, Winters cut the pay of several mean-spirited managers. "You don't have to abuse people to get good results," he says.

As an actuary, Winters, 60, may be the perfect Prudential CEO for the problematic 1990s. Actuaries assess risk and live in a world of hard numbers. The son of an Aetna actuary, Winters often tells subordinates he doesn't want off-the-cuff opinions; for him, positions must be backed by a solid body of evidence. A quiet, cerebral man, Winters is far different from his extroverted predecessor, Beck, who had a sales background.

One of Winters' largest challenges is simultaneously reining in and motivating his most venturesome executives, who are impatient with his strategy. He wants them to help position the Prudential for tomorrow's opportunities. But he also needs them to pitch in fixing the leftover 1980s weaknesses.

`GLACIER CITY.' This approach is especially tough for the go-go folks to take. Many of them have gone away to other jobs. Says one: " Pru is glacier city again." Those who stayed admit they are frustrated with the cautious thinking. James Stevens, for instance, chafes against senior management's decision to lock the insurer out of leveraged buyouts. "I argue that we made a lot of money on LBOs," says Stevens.

Instead, many of these executives are working to limit losses on 1980s deals. The Prudential refused a plan in January to bail out R.H. Macy Inc. by accepting a lower interest rate proposed for the retailer's bonds. The rebuff propelled the department-store chain into Chapter 11. The insurer figured that, since the paper is secured by the chain's valuable real estate, it would fare better in bankruptcy.

The company's commercial real estate division, which not long ago was shoveling dollars at a vast array of glittering building projects, nowadays is gradually selling property holdings. Most prominent: the Empire State Building for $40 million late last year. Eugene B. Heimburg, the Pru veteran heading building investments, is scrambling to get New York officials to allow postponement of its planned $1.5 billion, four-tower complex in Times Square until the city's devastated office market turns around. Under current agreement, the first building must open in 1995. Sighs Heimberg: "It's nicer to be sitting on top and building things."

Although innovation has not totally vanished from the Prudential, the hurdles for approval are higher than before. Pru President Ronald D. Barbaro, chief of insurance sales, had a tough fight getting the company to be the first top insurer to offer so-called "living benefits" riders, where terminally ill customers can draw part of their death benefits before they die. Barbaro got the idea visiting a dying patient in a Toronto AIDS hospice. "His family couldn't afford to come from Europe to be with him," recalls Barbaro. The living benefits proposal "ran into dozens of objections" from Prudential people anxious that it would bring financial losses. "They complained that they had no actuarial studies," he says. Barbaro managed to convince Winters that the program was worthwhile and wouldn't lose money. Now 18 months old, living benefits have hardly damaged the Pru, which has paid out an average $80,695 to 364 policyholders--and generated good publicity.

ROCK SLIDE. Yet while Winters is getting the Prudential to hunker down, he has been careful not to dismantle the new ventures of the 1980s, which he feels will eventually bolster it in competing against both fellow insurers and other financial-services gargantuas. The company denies rumors that it sought to sell Pru-Bache when it ran into distress. Winters ended up pumping in more capital and shaking up the brokerage's management in early 1991. Pru-Bache, renamed Prudential Securities Inc. and helped by the recent bull market, posted a stellar showing last year.

Contrast that to Citicorp, which spun off its Ambac Inc. municipal bond insurer. Or to American Express Corp., seller of Firemans Fund Corp., an insurer. Or to Merrill Lynch & Co., which got rid of its residential real estate unit in 1989 (to the Prudential, its last major new foray). "We build businesses," says Vice-Chairman Garnett L. Keith Jr., the insurer's chief investment honcho. "We don't trade them away."

Going forward, the Prudential enjoys some weighty advantages. The company's diversity and mammoth size are key ones, cushioning it in rotten years, when smaller operators get whacked. The Rock of Gibraltar trademark symbolizes the Pru's legendary reputation for stability. This steadfast image has lured new customers, scared by the limping performances of many insurance competitors--Equitable, Travelers, Aetna--and the outright collapse of others--Mutual Benefit, Executive Life, First Capital. Hence, executives say, the Moody's downgrade hasn't hindered the Pru's sales force at all.

VINYL FRONTIER. Certainly, insurance and annuity sales, the basic fuel that fires the Pru's engine, are doing spectacularly well. Premium income surged 21% last year. The Pru still faces a stiff fight with Met, which surpassed it in total face value of policies in 1988. Best known for cutesy ads featuring Snoopy, Met has padded that lead by acquiring en masse the life and annuity policies of stricken carriers such as Executive Life Insurance Co. of New York. The Pru develops new business piecemeal.

The Prudential is putting lots of resources into residential real estate, which it sees as its most promising new growth area. Unlike the overbuilt commercial sector, the private-home market is recovering from the recession. The Pru's mortgage unit, begun merely eight years ago, is now the No. 3 home-loan issuer nationally. The insurer also is devoting major attention to its home-sales company, which vaulted into the big time with the Merrill purchase. Currently in fourth place and not yet profitable, Prudential Real Estate Affiliates Inc. aims to be first in coming years. "They have staying power and are spending huge amounts of money," worries Richard J. Loughlin, CEO of No. 1 Century 21 Real Estate Corp., owned by Met Life.

On other fronts, however, the Pru's progress has been more fitful. Although it has been selling insurance in Japan for 10 years, it is still a latecomer overseas. The Pru recently secured toeholds in Korea, Taiwan, Spain, and Italy, and is eyeing a possible loosening of restrictions on foreign insurers in Mexico. But it lags far behind rivals. The Pru is also moving into credit cards. Some Pru watchers expect the insurer to begin an audacious push once the current card wars subside. Nonetheless, the Pru so far has issued a mere 320,000 cards through a bank it owns in Georgia--half of them to Prudential customers. That's a pittance measured against American Express' 36 million.

Much of the Pru's heartening financial performance lately has derived not from financial services but investing. The Prudential, which invests $200 million every business day, became very conservative in 1991, focusing almost exclusively on government and investment-grade bonds and shying away from equities. That has proved a sound, if uninspiring, bet: The bond market was buoyed by steep Federal Reserve interest-rate cuts. But Vice-Chairman Keith admits the Pru could have gotten an even richer payoff if it had made a stronger stock play.

With interest rates at record lows, the Pru will be hard-pressed to repeat 1991's bonanza. The company's capital growth in 1992's first quarter was just 3.1%. If that continues, 1992 performance will be little better than half of 1991's. "Unless there's another bond market rally, which is unlikely, they won't get those same massive capital gains," says Lee Slavutin, head of Manhattan insurance consultant Stern Slavutin-2 Inc.

That's no matter to Winters. "By taking risk out of the enterprise, we are well-positioned for the future," he says. After the pell-mell growth of the 1980s, the Prudential has again become true to its name. Yet too much prudence could be the biggest risk of all.

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