1 Stephen Street
The Prudential Corporation (the Pru) is a dominant force in financial services in the United Kingdom. The corporation's pretax trading profit in 1989 totaled £385.5 million. The company is the third-largest property owner in Britain, after the Crown and the Church of England. Its holdings of 3.5% of the stock quoted in London makes the Pru the largest investor in British stock markets. The corporation also operates the largest life assurance, pension, and reinsurance companies in the United Kingdom. The corporation's other ventures include an estate agency and a unit trust operation. Sir Brian Corby, the chairman, had declared bluntly in a 1986 announcement of corporate changes that "our ultimate aim is that everyone in Britain considering an important financial decision should look to the Prudential . . . first."
In 1848 political rebellion surged across Europe, while England contended with Chartist unrest. For a group of investors who gathered in London in May of 1848, however, revolution promised financial opportunity. Secure in the knowledge that crises create a desire for security, they pledged to raise £1O0,000 to organize the Prudential Investment, Loan, and Assurance Association which was in the end registered as the Prudential Mutual Assurance, Investment, and Loan Association. The company soon was renamed Prudential Assurance Company Limited. The founders, led by Chairman George Harrison, included a doctor of divinity, a naval officer, a leather merchant, a surveyor, a surgeon, and an auctioneer. In this competitive industry mere survival was an achievement. Between 1844 and 1883 1,186 insurance promotions were launched; 612 companies actually were formed, but only 93 survived in 1883. During some parts of that time period, insurance companies failed at the rate of 100 per year.
Most of those companies echoed the Prudential's early determination to serve an established middle-class clientele. The Prudential hoped for a patronage from clergymen, barristers, and successful tradesmen, seeking what was perceived as a profitable market segment. The poor had unhealthy occupations and inadequate housing and suffered most from the frequent epidemics of the period. Conventional wisdom in the insurance field also emphasized the inconvenience of managing a myriad of small policies. The anticipated high overhead of any collection system convinced most professionals to avoid this segment of the market. Following such conventional wisdom brought the Prudential to the edge of bankruptcy. In its first 18 months, the company generated a mere £1,500 in premium income. In 1851. the amount was still under £2,000. By 1852, the prospects for the company's survival were bleak.
New conditions in the insurance industry in the 1850s provided the Prudential with the opportunity to thrive. As late as 1845, insurance remained a prerogative of the upper classes of British society. Of a population of 25 million people, fewer than 100,000 held life assurance. This distribution changed with the emergence of industrial life assurance companies selling policies to members of the working class. H.A.L. Cockerell declared in The British Insurance Business that these companies "revolutionized the social distribution of life assurance." Such a company offered policies worth £20 or less and established a regular collection system outside the registered office, its legally designated location for official correspondence.
Two events in 1852 encouraged the Prudential to consider a change in policy. A select committee of the House of Commons called for an expansion of insurance to all classes of society. Perhaps more important, the operatives of the Prudential had become restive with the existing approach. A deputation called on the secretary of the Prudential and urged entrance into the industrial field. The agents wished to follow the example of friendly societies, a form of benevolent association, which provided benefits to their members. These associations offered an example of close personal contact between agent and member. The directors offered a lukewarm response. Only a few industrial policies were issued in 1854, but they proved to be the seed of future greatness.
Henry Harben, who succeeded Henry Charles Barfoot as secretary in 1856, recognized the possibilities of industrial assurance. The Century of Service recalled his shrewd observation that "it is far more prudent to take the pick of the small policies than to have the crumbs which fall from the rich man's table." Careful management and cautious expansion produced a more stable company. In 1864, Harben turned a potential disaster into a tremendous success for the company. Gladstone, then chancellor of the exchequer, criticized the operations of insurance companies, including the Prudential. Harben counterattacked vigorously. Not content with a war of words in the press, he called in independent actuaries who confirmed his claim that the company was sound and well managed. As a result of those actions, the Prudential experienced a dramatic rise in business and began to establish its reputation for reliability.
Gladstone's attack inadvertently aided the Prudential in another way. Gladstone's attack made many small companies vulnerable. Many went out of business. In 1860, the Prudential had acquired its first firm, British Industry, changing the corporate name to the British Prudential Assurance Company. That action had spurred growth in industrial policies. The Prudential acquired an additional five companies in the 1860s.
By 1880, the Prudential had become the leading company in industrial policies. By that time no other industrial-insurance companies extant in 1854 still existed. The following decades witnessed steady growth for the company. By 1905, the Prudential had issued 25 million policies in a population of 43 million. As Barry Supple acknowledged in The Royal Exchange Assurance, a history of a rival company, the Prudential had become "virtually a universal habit."
Leadership of the company remained in the hands of its founders into the 20th century. Edgar Horne, a founding director, served as chairman between 1877 and 1905, when Henry Harben succeeded him. Two years later, Harben, 84 years of age, passed the chairmanship to his son, Henry Andrade Harben. When H.A. Harben died in 1910, Thomas Dewey--with the company for 53 years-became chairman. Founder Horne's son, William Edgar Horne, was chairman between 1929 and 1941.
The Prudential succeeded because of a single-minded determination to meet the needs of its customers. Around the turn of the century, a post office official selling government insurance policies summed up the difficulties of competing with the Prudential. The commemorative volume, Century of Service, recalled with pride the competitor's complaint that the Pru "made a point of smoothing over difficulties, of waiving objections and carrying through the business very promptly." Good customer relations became the touchstone for evaluating policy. Maintaining contact between company and customer became the first priority in times of economic difficulty. The company worked to keep on the books customers who had fallen in arrears. The company also initiated a policy of bonuses for industrial policyholders. Between 1905 and 1948 over £78 million had been paid. The block system of collections, established by the 1920s, became the hallmark of the company's operations. Each agent had an area on the map defined as his territory. He would make a set number of calls per week. The efficiency of the system allowed management to reduce staff and cut costs. By 1948 representatives visited five million homes. The "man from the Pru" had become a national institution, celebrated in popular culture.
Never was the stature of the Prudential more evident than in its participation in the two world wars. Warfare poses a true crisis for insurance companies since no actuary can calculate the likely number of casualties. Certainly no actuary could have predicted the carnage of the Western front in World War I. The Courts (Emergency Powers) Act of 1914 had protected many customers against forfeiture of coverage due to nonpayment of premiums. The Prudential volunteered to honor the policies of those who died as a result of the war, providing that the policy had been initiated before the war. The Pru's most dramatic contribution came in 1915. The country badly needed U.S. dollars. The Prudential placed its total dollar securities, valued at £8.75 million, at the government's disposal.
During the World War II, the Prudential invested £242 million, over 50% of corporate assets, in government and government-guaranteed securities. The Prudential paid £5.5 million in war claims. The company could have denied half of those claims, since the policies in question had restricted liability to a return of premiums already paid. The directors, however, chose to suspend that provision. The traditions of customer service and national service became indistinguishable in such actions.
The giant company had become a national institution. In the decades following World War II the Prudential did not undertake initiatives in a changing economy, but remained a dominant force in life assurance, emphasizing its traditional strengths. By the 1970s some financial observers began to believe that the Pru owed its dominance to sheer inertia, as the company failed to create new service and delivery systems. Senior managers began to realize, in the words of Brian Corby, the lifelong Prudential employee who became CEO in 1982, that "the Pru has no God-given right to stay the biggest." This simple realization, which Corby expressed to the Investors Chronicle in March 1986, laid the foundations for the most significant change since the decision to sell industrial policies.
Searching for methods that would make it more responsive to market forces, the company chose a policy of decentralization. In 1978, the corporate holdings were reorganized. Prudential Corporation was established as a holding company. Prudential Assurance became a subsidiary. In 1984 a more thorough reorganization created seven operating divisions: U.K. individual, U.K. group pensions, international, Mercantile and General Reinsurance, Prudential Portfolio Managers, Prudential Property Services, and Prudential Holborn. A number of ancillary services remained outside this divisional structure. By 1986, the reorganization began to show signs of success. As the Financial Times of May 4, 1986 noted: "The City finally woke up to the fact that a series of apparently unrelated corporate moves were in fact part of a strategy to bring the bulk of the iceberg out of the water."
The new approach emphasized foreign expansion and acquisitions. Fiammetta Rocco in the August 1989 Institutional Investor, pointed out that the Pru had been unique among the great 19th-century insurance companies because it thrived as an English rather than an imperial institution. After World War I, the Prudential had expanded into general insurance, and the new general branch had engaged in modest overseas enterprises. In 1921, the Pru had begun to sell fire and accident insurance in the Netherlands and France. Other operations in Europe, the Commonwealth, and South America followed. However, these enterprises did not alter the character of the company. The attitude toward acquisitions began to alter slowly. Between 1968 and 1973, the Pru acquired the Mercantile and General Reinsurance Company from Swiss Reinsurance Company. This purchase established the Prudential's preeminence in the reinsurance field. Other major additions included the purchase of the Belgian firm L'Escaut in 1972--sold in 1990--the Canadian firm Constellation in 1978, and the Insurance Corporation of Ireland (Life), now Prudential Life of Ireland, in 1985.
Most important was the acquisition of the U.S. Jackson National Life Company in 1986. Approximately 2,000 companies were selling insurance in the United States at the time. Jackson National Life ranked 18th in new ordinary insurance sold, 60th in premium income, and 91st in assets. Purchase of one of the fastest-growing U.S. insurance companies did more than give the Pru an important share of the U.S. market. The purchase price of US$608 million brought an innovative and technologically advanced firm into the Pru family. Jackson National Life had been a leader in developing term life and universal life policies. Its operations were computerized and more efficient than the Prudential's administration. Jackson National Life would become an in-house resource for the modernization of Prudential's management. This acquisition indicated the Prudential's determination to recast itself at the end of the 20th century.
The determination to reshape the company did not require abandoning the company's established principles. The company had thrived because of its care for customer needs, willingness to deal with small customers, and determination to judge success on the basis of long-term profitability. These principles guided new ventures such as entrance into estate agency. The Prudential sought access to the younger generation of consumers, a group not concerned with life insurance, but interested in acquiring housing.
In 1985, the Prudential purchased an East Anglian real estate agency as an experiment. Success in the local operation inspired a national effort. Because most estate agencies were small and local, Prudential Property Services became a major force almost overnight. By 1989, the company had over 800 local offices. Due to the expense of this rapid expansion and the downturn in the property market, the company expected to lose as much as £35 million in 1989. The Prudential's plan, however, anticipated that this enterprise would encourage young adults to become customers for other Prudential products.
Circumstances forced some changes on the Prudential Corporation. The company's reorganization coincided with revolutionary changes in financial services in Great Britain. Prior to that decade, insurance companies, banks, and building societies had offered discrete services. New government policies under Prime Minister Margaret Thatcher spurred innovation. In 1984 the government abolished life assurance premium relief, a tax advantage which had attracted many customers. The move shocked insurance companies, who were forced to adjust to the new situation. As Brian Corby informed the Financial Times, reported March 4, 1984, "we must recognize we are in competition for the savings pound with every one else."
Seeking opportunities to expand its services, the Prudential Corporation established Prudential Holborn as its unit trust investment branch in 1985. The move appeared natural. No company seemed better suited to deal with small, cautious investors. The venture did not meet with immediate success. Prudential Holborn was founded just in time to feel the effects of the stock market crash. The unit trust business remained depressed for the rest of the decade. Prudential Holborn lost £105 million in 1988, and made a profit of £1.7 million in 1989. Prudential Corporation, though, remained content that the company was well positioned for an inevitable rise in the market.
This rapid expansion into a number of new services created a novel problem for the Pru: lack of consumer recognition. The corporate name was famous but the general population could not keep pace with the rate of corporate change. In 1986 a company survey discovered that only 20% of those who knew the Pru realized that the company had recently entered the mortgage business. Clearly, the other 80% were not thinking of the Pru first for every financial need. The diversified Pru required a higher profile and more advertising. When the Thatcher government deregulated the State Earnings--related Pension Scheme in 1988, the Pru launched a massive campaign for new pension business. Ten million people were covered by the state plan. Those who chose to leave would receive a rebate which could be invested in a new plan. The Prudential spent £7 million on advertising. In the opening stages of deregulation, the company issued 220,000 new contracts worth £110 million. After a decade of reorganization, the Prudential Corporation presented a blend of traditional practice and innovation. The famed sales force remained 12,000 strong, still visiting five million homes for pension contributions and life assurance premiums. In an age of computers, this labor-intensive approach appeared anachronistic, but the system produced £1.3 billion in premium income in 1988. Prudential needed to convert this sales force into specialists able to market an integrated package of financial services, and 4,000 had been retrained by the end of 1989.
The leadership of the Prudential Corporation provided the best indicator of future development. Sir Brian Corby, who directed much of the reorganization, had been trained as an actuary. His successor, Michael Newmarch, who became CEO in April 1990, also was a lifelong Prudential employee. However, Newmarch had served as an investment manager not as an actuary. The new portfolio manager in 1989, Hugh Jenkins, had no previous experience with the Prudential Corporation. This highly regarded manager oversaw a portfolio valued at £35 billion. Asked to comment on the appointment of Newmarch, Jenkins observed discreetly that, "the investment function has come to the top." This phrase may sum up the future of the company as well.
Principal Subsidiaries: Prudential Assurance Company Limited; Prudential Holborn; Prudential Property Services; Prudential Corporate Pensions; Mercantile and General Reinsurance; Prudential Portfolio Managers; Jackson National Life (U.S.A.).
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