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The Prudential Insurance Company of America is one of the largest diversified financial institutions in the world and, based on total assets, the largest insurance company in North America. Along with its primary business, insurance, the company also operates in securities, investments, residential real estate, employee benefits, home mortgages, and the corporate relocation industry. In 1999 Prudential was in the process of reorganizing as preparation for a transition to demutualization and public ownership, pending regulatory approval, in 2000.

Unprecedented Growth and Scandal: 1980s

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 now 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 recent 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 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. But 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 now 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.---Source: fundinguniverse.com