Lehman/A.M. Best Co. 2nd Annual Conference

"Our mix of business will be much more diversified that other demutualizing companies," Grier said. Mark Grier The Prudential Insurance Company of America

Prudential Hones Financial Strength as It Demutualizes

As Prudential Financial navigates through the demutualization process and braces for its debut on Wall Street later this year, the company is doing a lot of work to get its financial house in order, said one top executive.

Mark B. Grier, executive vice president of financial management for Prudential, told an audience at the Second Annual Insurance Conference, co-sponsored by A.M. Best Co. and Lehman Bros., that "the message is--we get the message."

For at least five years, Prudential has been working to strengthen its financial position, and for the past two years, that effort has accelerated as the company planned for demutualization, Grier said. "We will be a much cleaner company," he said.

Over the past five years, Prudential has exited some underperforming businesses, including mortgage banking, health care and reinsurance. The company's demutualization process hinges on a strategy called "destacking," or separating key businesses into sister companies under a parent holding company, Grier said. "With destacking, we won't have the operating risk of subsidiaries tied together," he said.

Some of the actions taken over the past few years included the absorption of $4.4 billion in costs, including litigation and settlements, and $1.5 billion in losses related to the company's old health-care business, Grier said. "We have refocused our portfolios and determined to maintain a conservative capital position," he said. "We had a lot of stress on the company over the past five years. Now we're clearing the decks for demutualization.

"Our mix of business will be much more diversified that other demutualizing companies," Grier said. "We will have essentially two pieces--financial services and closed block." The closed-block portion of the new Prudential will hold the company's insurance operations.

Prudential's initial public offering plan included the issuance of Class B stock and debt notes issued by an intermediate holding company, Grier said. The Class B stock, which will be placed privately, is of particular interest, Grier said, because it essentially will act to securitize the risk of the insurance businesses. "We're excited about this piece of the business," he said. "Other demutualizing insurers have reinsured their insurance business. But we think this frees up capital for us."

Prudential is focusing on key markets as it prepares to go public, Grier said. In the United States, the company is the top seller of both group life and variable life products, he said. "As for the variable life, we believe that is the perfect product for what we are becoming as a company," he said, " since it a combined life and asset-management product."

The company is targeting the "mass affluent customer base"--households with $100,000 or more in income or investable assets. Grier said Prudential now has more than 2.5 million customers in this market, and the company believes there is room for growth.

Another Prudential strategy--the unbundling of products--fits the mass affluent market target, Grier said. "They have information and advice from many sources, they can execute (a financial move) in a thousand different ways," he said. "That is probably the most important external influence on our product base, because we were that traditional bundled product."

Asked by an audience member if Prudential wasn't perhaps "late to the party" with its target high-end market, Grier replied that the $100,000 market is "a notch below" the highest end, which he said other companies have gone after most. "We do very well in the mass affluent market," he said. "We're doing well in the highest end as well, but we believe we're not too late for the mass affluent customer base."

Other insurers have reached out to this market, as well. In January, Lincoln Financial Distributors President and Chief Executive Officer Jon A. Boscia said his company had completed the transition from a multiline insurance company to a financial-services company with a focus on wealth-accumulation and asset-accumulation products and services (BestWire, Jan. 17, 2001). Phoenix Home Life Mutual and Hartford Financial also have set their sights on the affluent market.

Grier added that Prudential's international operations include highly successful sales forces in Japan and Korea, a growing presence in Taiwan, success with financial services, and new efforts in Latin America and "selected Asian countries. "Our international operating income more than doubled from 1998 to 2000," he said.

(By David Pilla, senior associate editor, BestWeek: David.Pilla@ambest.com)