Chip off the Old Rock
(See Cover)
How long will you live?
Today everybody expects to live longer. But the man who can give the best longevity estimate, at least for one out of every five Americans, is Carrol Meteer Shanks, president of the Prudential Insurance Co. of America, which has 33.2 million carefully analyzed policyholders. By charting a man's age, background, diseases, job, habits, even his morals, the Pru can chart the odds on the death age down to the last decimal. The Pru's tables show that a male policyholder aged 21 will probably live to be 73 years old, one aged 30 will live to 74, one 45 can expect to live to 75. It also knows that its women policyholders live three years longer than the men it insures.
The Pru, of course, also knows what odds to expect on its president, who turns out to be the perfect risk. At 58, with a trim 175 Ibs. spread over his 5-ft.-10-in. frame. Shanks is lean and rosily healthy. As insurance pamphlets advise, he likes to get eight hours' rest most nights--10 p.m. to 6 a.m. He does an hour's calisthenics before eating a sensibly big breakfast. Trlis other meals are light; he tries to keep lunch within 300 calories and dinner within 700. He does not smoke, rarely drinks, and has few financial worries. His salary is $250,000 a year--more than any other life insurance executive. He is a family man, a good Methodist, and thriftily drives a well-weathered 1948 Cadillac. According to the Pru's actuarial tables. Policyholder Shanks has a good chance of living to be 77. When he dies, he will have the satisfaction of leaving his family secure. At a cost of $27,000 in premiums annually, something that keeps him "insurance poor," Shanks will leave his heirs policies totaling $450,000.
Gibraltar into Volcano. But if Policyholder Shanks is as predictable as the dawn, Prudential President Shanks is not. In the insurance industry, he has erupted with such force, in the pursuit of new ways to sell insurance and new ways to invest the Pru's billions, that he has turned the Rock of Gibraltar, the company's famed trademark, into something resembling a volcano. By dint of his ideas and exertions, Shanks has not only become one of the most respected spokesmen for U.S. life insurance, but has also made the Pru, whose head offices are in Newark, N.J., the fastest-growing company in a rapidly expanding industry. In the last 30 years the U.S. life insurance industry has more than doubled its policyholders, quadrupled its insurance in force, and nearly quadrupled its assets.
Last week, with 1956's figures all in, President Shanks announced that the Prudential had passed its biggest rival. Metropolitan Life, as the world's No. 1 seller of life insurance. In 1956 the Pru sold $8.2 billion worth of new insurance, now has a total of $58 billion worth of insurance in force. With assets of $13.3 billion, it ranks as the world's third largest company of any kind.*
All told, with life insurance policies for five out of every eight Americans, the U.S. insurance companies this year will see their assets push past $100 billion--three times the funds of U.S. savings banks, more money than the gross national product of West Germany, France and The Netherlands combined. Total life insurance in force: $415 billion.
For Shanks, even that is not enough. Growing public desire for more security threatens his company with a new competitor far stronger than any within the industry: the U.S. Government itself, which is steadily expanding social security and other federal welfare programs. To compete, says Shanks, "we must give complete coverage--and I mean complete. We would like to give such complete coverage that there is no legitimate demand from the public for Government intervention. We would like to show that private enterprise can do the job. But to prove it, we've got to do it now."
Angry Argument. In ten years as boss of the Pru, Shanks has taken some giant steps along the road to insurance for all, has boosted the company's sales 165%, its assets 95%. He is a great believer in group insurance by which entire companies can insure their work force for far less per capita than the cost of insurance for an individual, will now insure groups as small as four. Pru is a leader in group "major medical insurance," which protects families against big doctors' bills (up to $10,000), has sold it to over 500,000 U.S. families. He pioneered the "payroll budget plan," which gives policyholders 33% discount if they have premiums deducted from their paychecks.
Last year Shanks launched his biggest innovation: family insurance for as little as $10.90 a month. It covers the lives of an entire family--father, mother, children--under the same policy, provides benefits of $5,000 for a 25-year-old father, $1,000 for the mother and up to $1,000 for each child more than 15 days old. In the first four months after the plan started, 250,000 families signed up for $1.5 billion worth of the new insurance, made it by far the Pru's bestselling policy.
Shanks touched off the angriest insurance argument in years with his proposal for the "variable annuity" (TIME, July 2), which Shanks maintains would help protect retired policyholders against the rising cost of living by putting 50% of each annuity fund into common stocks.
The variable annuity has been heavily criticized. President Keith Funston of the New York Stock Exchange fears that it may become a tax dodge because insurance companies are exempt from the capital-gains tax, therefore common stock investment might become concentrated in insurance companies. President Frederic W. Ecker of rival Metropolitan Life argues that it will destroy public confidence in insurance investments. At a recent hearing, Ecker snapped: "I don't want to be answering letters from policyholders which say: 'Last year you paid me $100 a week; now you're paying me only $80 a week.'" Answers Shanks: "I believe that people will lose more confidence in us if we fail to give them some protection against the fluctuating value of money."
Twice since 1955, Shanks has tried to get the state of New Jersey, where the Prudential is chartered, to pass legislation permitting the Pru to sell variable annuities. Twice he has failed. This year he will try again.
Billions in the Reservoir. Such an unceasing sales campaign is only half of Shanks's job. The other is investing the Pru's vast wealth.
With nearly $100 billion in assets, U.S. insurance companies are the nation's greatest reservoir of private capital, the dispensers of investments that have an incalculable impact on the U.S. economy. Last year some $10 billion of life insurance funds was invested in the U.S. economy, $1.6 billion of it by Prudential. Almost anyone, big businessman or little, farmer or factory hand, can qualify for a Prudential loan or mortgage. At the top of the Pru's list of borrowers is a Who's Who of U.S. industry: International Business Machines (some $550 million since 1936), General Motors, Chrysler Corp., Union Carbide & Carbon Corp., International Harvester, Goodyear Tire & Rubber.
The giants are only a fraction of the Pru's business. At President Shanks's direction, the company pours an even bigger chunk of its treasure into mortgages and loans to individuals and small businessmen. All told, $6.1 billion of the Pru's assets, some 46%, is tied up in mortgages and real estate, proportionately more than any other life insurance company. The Pru is the world's biggest private holder of home mortgages (500,000), one of the biggest financers of huge skyscrapers (Manhattan's Empire State Building, Chicago's Merchandise Mart, Cincinnati's Terrace Hilton Hotel), a strong backer of the new shopping-center boom. It supplied $8,000,000 for Minneapolis' new Southdale Center and $100 million for Los Angeles' Lakewood shopping center and for more than 7,500 houses in a new development surrounding the center. In every U.S. activity there is Pru money, from cattle and cotton to guided-missile factories, race tracks and country clubs.
Nor does the Pru stop there. The apple of President Shanks's eye is a new Commercial and Industrial Loan Department, set up to make funds available to small businessmen who ordinarily cannot get long-term loans through normal bank channels. "What we're looking for," says one Prudential executive, "is the nice little company making a nice little product in Bucyrus, Ohio." The Pru has found plenty of them. Among the loans: $200,000 to help reforest a Florida tree farm, $750,000 to a Nashville religious-book company, $54,000 to Kansas City's Papec Machine Co., makers of agricultural appliances, another $120,000 to six El Dorado (Ark.) doctors who convinced the Pru that their town needed a medical center.
Free Lunches. To do a better job selling insurance--and spreading loans evenly throughout the economy--Shanks kicked off the biggest decentralization program in the history of U.S. insurance. Since 1946 the Pru has opened six regional offices spread across the U.S. and Canada. Shanks laid out more than $10 million for a towering Los Angeles home office, another $10 million for a 21-story Houston home office to back the Pru's faith in Texas' booming economy, still another $40 million for a 41-story Chicago home office that was the first new skyscraper to rise over the Lake Front in 20 years. Millions more went into Minneapolis, Jacksonville and Toronto for modern regional home offices with air conditioning, restaurants (free lunches for employees) and auditoriums; the Houston office even has a swimming pool. Everywhere the Pru plunked down its dollars for handsome new buildings, it brightened the faces of cities and spurred local economies.
The Prudential's latest project is a $100 million regional home office and city center in Boston (TIME, Feb. 11). Many insurance men would quail at such an enormous expenditure. Says Shanks: "You can find all the reasons for not doing a thing, or you can find some reasons for doing it. If the reasons for doing it are good, then you have got to have the courage to try it, and work out the problems as they come up."
To some, the success of the Prudential's investment policy, spreading its wealth into big and little companies, is worrisome. Many a Congressman frets that insurance companies have accumulated too much power over too much of the U.S. Shanks has acted as spokesman for the industry in its defense before congressional committees. Once, testifying before a House monopoly subcommittee, he outlined his aims so lucidly that even New York's New Dealing Representative Emanuel Celler was mollified. Said Celler: "Shanks made the best impression of all. He indicated an awareness that insurance companies, due to their size, must exercise social responsibility." Actually, Shanks is not worried that the industry is too big. Rather, he worries that it is too small. As the U.S. economy grows by leaps and bounds, the U.S. is putting a smaller percentage of its income into insurance, last year invested only 3.8% of disposable income in insurance v. 5.1% in 1940. The problem is: How to get more savings into insurance, to supply the loans for the expanding U.S.?
Feasts & Fortunes. If the Prudential's Shanks is only too well aware of his sociological responsibilities, many of his predecessors in the industry could hardly have cared less about such niceties. In the early days of U.S. insurance, most firms were stock companies concentrated in the hands of a few powerful men who treated policyholders with royal contempt, and piled up royal fortunes. By 1905, scandals so wracked the industry with revelations of fraud, corruption and lavish parties given by insurance executives that New York State 'started an investigation. It uncovered such fraud that before long the industry was under stricter governmental control; sharp-eyed insurance commissions in every state took a closer look at company books, regulated every operation from policies to investment.
The Prudential was not seriously involved in the great scandals. Founded a quarter of a century earlier by a sober, bookish young man named John Fairfield Dryden, it did its first business in "industrial insurance" for the workingman, policies that cost only pennies a week for up to $500 worth of life insurance. By 1911, when Founder Dryden died, it had 10 million policyholders on its rolls, soon afterward started shifting over from a stock company to a mutual operation owned by its policyholders.
Fringes & Flints. As the Prudential's seventh president in 81 years, Carrol Shanks sits behind Old John Dryden's huge mahogany desk, in a suite of offices in Newark built in the days when insurance men spent heavily for purposes of prestige. Hand-carved Honduras mahogany frames the president's doors and windows; the walls are covered with silver-filigreed blue paper, the ceiling fringed with gold leaf; deep piled rugs smother the floor. Shanks sometimes works in his shirtsleeves, dials his own phone.
Shanks hates memos, delegates responsibility, passes out assignments with the informality of a man offering a stick of gum. When tapping the man to head the Pru's $5 billion Midwestern operation, all he asked was: "How would you like to go to Chicago?" Yet Shanks can be a flinty chip off the old rock with anyone who attempts to balk his overall policies. "I hate to be frustrated," he says. Last year, when a bitter disagreement came up over his idea of pushing small loans, Shanks stood it as long as he could, then shook up his bond department from top to bottom. Two executives were fired, six others quit.
At least 25% of the time, Shanks is out on the road--and the trips are man-killers. Says the boss of the Toronto regional head office: "We brought him here one Sunday afternoon to do some work; he went to Winnipeg, where he gave two or three speeches, met every single Prudential employee, met the mayor, the Premier, went on TV and radio twice in one day. The same thing happened in Edmonton, Calgary, Vancouver. The rest of us were all pooped out. But he just thrives. If he's at a dinner party one night, he's perfectly willing to have the press in for breakfast--every morning."
Shanks, a resolute homebody, is almost unknown in suburban Montclair. N.J., where he lives with his wife Martha. Their three children--Wallace, 31, Margaret, 28, Meteer, 25--are married and living away from home. His main relaxation is the piano; he practices 1 1/2 hours each day, takes a weekly lesson from the same teacher he has had for nearly 20 years, and once every year sits down to a duet with her at a local recital. Since he became president, he has read innumerable books on how to be a successful executive, and has yet to find one, he says, "that indicates that I have a chance."
From Fairmont to Gibraltar. His father was the postmaster of Fairmont, Minn.--a firm-handed Methodist who looked on liquor as the root of all evil. From the start, young Carrol was smart in school. Following an elder brother, he went to the University of Washington, made straight A's, Phi Beta Kappa, the presidency of Beta Theta Pi. courted his future wife, and clerked afternoons and Saturdays in a downtown Seattle shoe-store. Married in 1921, he headed East to Columbia law school, where he made a reputation for himself both as a bright young lawyer and a boxer with a Sunday punch. Once, when a cocky student dared Shanks to hit him on the chin, Carrol obliged--and knocked him cold.
Shanks took a job teaching law at Yale, wrote four legal books with a Columbia classmate and lifelong friend, Supreme Court Justice William O. Douglas. But teaching was not for him. "I wanted something to happen, wanted to hear the telephone ring." Moving on in 1931, he took a job with Root, Clark, Buckner & Ballantine, one of the big Manhattan law firms, and again was disappointed. "Law is bookish," says Shanks. "I like the action, the battle, the campaigns." Finally in 1932 he found just what he wanted. Over in Newark, the Prudential Insurance Co. of America, with millions invested in railroad bonds, asked Root, Clark for someone to help with their portfolio. Shanks was the man. Overnight he started a rise punctuated by enough battles to satisfy any warrior.
"I'd Hate to Think." Shanks rose swiftly, first as an adviser to the Pru's brass on their railroad securities, later as general solicitor for the company, finally in 1939 as a vice president. By 1944 he was the Prudential's executive vice president, second only to President Franklin D'Olier. With D'Olier away much of the time working for the government on the war effort, Shanks gradually became the company's acting president. Typically, one of his first moves was to call his vice presidents together and ask: "All right, now what is our biggest problem?" Everyone had the same complaint: New Jersey taxes. They were levied on the Pru at an annual rate of $5.50 for every $100 surplus in their treasury, far more than New York (where some of its biggest competitors were) and other states charged their companies. It put the Pru in the worst possible competitive position.
Quietly and inflexibly, Shanks laid it on the line to state officials: either taxes come down or the Pru, one of the state's biggest taxpayers, would move out. The fight that followed was so rough that more than one vice president got sick and had to retire. Finally Shanks won: New Jersey reduced the Pru's taxes. Says Shanks: "I'd hate to think what would have happened if I'd failed."
Two years later, at 47, Carrol Shanks was the Prudential's boss. Franklin D'Olier opened a board meeting by announcing that he wanted to move up to chairman. "And here," said he, pointing to Shanks, "is your new president."
Agents & Actuaries. Since then, Shanks's biggest fight has been to revitalize the Pru. When he took over, it was an empire of some 40,000 employees, counted annual sales of $1.8 billion, total insurance in force of $23.7 billion. Yet Shanks thought the company was sitting on its hands. Group insurance sales were only a trickle, and ordinary life was gaining too slowly. Shanks vowed that his agents would be the world's "best trained, best selected and best supervised" insurance salesmen, instituted training courses that last as long as three years for his 18,500 agents.
There is nothing of the soft sell in the Pru's old-fashioned salesmanship. Like Fuller Brushmen, each agent has 300 to 400 families to cover. The Pru man gently but bluntly reminds his customer of the need for a "cleanup" fund to handle funeral expenses, explains what social security and company pension plans will provide. He asks his prospect if he wants to leave his family a home or just a mortgage; He talks about education for the children. "Invariably," says one Pru executive, "the worried prospect lays down a program he can't possibly afford." Then, the Pru agent's job is to match salary and security, start his man off on a sense-making scale, gradually move him up. Result of the Pru's hardheaded approach: 46,500 new insurance policies issued every seven days.
Q-Waves & Cigarettes. Few policyholders have the remotest idea how the Pru figures the premiums they pay on their insurance. One of the great misconceptions is that insurance men simply use a set of standard U.S. mortality tables. But the mortality tables are only a start. Every company has its own constantly changing tables, based on its own experience with policyholders. The Pru keeps close tabs on the card files of each one of its 33.2 million policyholders, watches for any unusual increase in deaths throughout its thousands of classifications. When it finds such an increase, the odds--and the premiums--change accordingly. Its actuarial department alone employs 1,000 mathematicians whose job translating the death odds into dollars and cents is so complex that it would put a Las Vegas gambler to shame. Sample question for an actuary's exam: "What is the probability of throwing exactly nine heads exactly twice in five throws of ten true coins?"*
Actuaries do only part of the job. The U.S. insurance industry also does more medical research on a wider variety of diseases than any other business, with the possible exception of the drug industry. The Prudential itself carries on dozens of different studies on everything from arthritis to high blood pressure, calculates how they affect the odds. For heart research alone, the Pru has a file of 25,000 electrocardiograms, one of the biggest in the world, which it uses to study the effects of the various heartbeat patterns (P, Q, R, S and T-Waves). Years ago the Pru refused to accept applicants whose cardiograms showed deep Q3-waves. Now it knows that deep Q3-waves are often meaningless, accepts most applicants. The Pru never says that any one individual will die sooner than another. What it does say is that, actuarily, in any given group of 1,000 people with a heart abnormality, possibly 30% will die before their time, and that it must charge all a certain penalty to cover the added risk.
Today, like every other company, the Pru is constantly revising its ideas of what a risk is. Once, policy seekers who had tuberculosis but recovered were considered uninsurable. Now the Pru charges only a slight penalty plus a temporary extra charge, which it takes off after several years if the policyholder remains cured. On the other hand, the Pru's doctors look with increasing suspicion on cigarettes as a possible cause of cancer; the Pru has considered giving a credit to light smokers.
Currently, a few deadly diseases are absolutely uninsurable, not only by the Pru and other first-line companies but by second-rate companies that will insure those whom the first-line companies turn down. Some day even people with cancer may be able to get insurance. New studies show that many risks are not so great as insurance men thought, and that almost anyone can be insured--at a price. Says one Pru executive: "Every company is taking risks now that would have been unthinkable five years ago. Our job is to see how we can accept the risk, not turn it down."
The Future. As modern medical science conquers more and more of mankind's ailments, the odds the Prudential sets for its policyholders will inevitably improve. Yet before it can knock any big dent in insurance rates, it must first lick the same problem that every U.S. businessman faces today: rising costs. The fact is that the steady increase in U.S. life expectancy, through antibiotics and other advances, has been just about matched by the rising costs of operating insurance companies. Thus the companies have not been able to give policyholders the cheaper insurance everyone wants and expects. The only immediate solution to the problem, says Shanks, is for the industry to increase the return it gets on its investments. What worries him is that too few insurance companies are using all the tricks in the financial bag to lessen the effects of inflation by making their dollars work harder. He argues that many companies could invest their huge wealth to get a bigger return on their money.
In 1956 the average net return after taxes on investment for U.S. insurance companies was only 3.33%; the Pru itself had to settle for 3.47% v. 4.9% in 1931. Too much money goes into prime big-company bonds and notes, with their relatively low interest rates, too little into mortgages and smaller loans. In 1956, while Metropolitan had put $353 million into eight huge housing projects in four cities (including Manhattan's Peter Cooper Village and Stuyvesant Town), 62.9% of its total assets was in bonds, stocks and notes. Equitable Life Assurance, which has lent Eastern Air Lines $40 million for new jet planes, and Real-Estate Man William Zeckendorf $40 million to buy New York City's Chrysler and Graybar Buildings, has 62% of its assets in securities, only 29.3% in mortgages. John Hancock has 66.6% of its assets in securities of various kinds, Aetna 65.1%. By contrast, the Prudential had only 45.9% of its assets in securities, put a big 43% of its funds into mortgages, which pay top interest rates of 5% to 5 1/2%.
Even securities investments themselves need a thorough overhaul. Metropolitan Life puts less than 1% of its money into preferred and common stocks. Not so, Shanks. The Pru has 2.2% of its money in the stock market, figures to profit not only from generally higher yields but also from capital gains as prices rise. Soon Shanks hopes to increase the percentage to 5% or even 10%.
To a traditionally conservative industry, Prudential President Shanks's ideas sometimes sound like the rankest kind of heresy. Yet he is convinced that insurance men must change their, thinking if they hope to serve the expanding U.S. population successfully. They must find new and exciting approaches to spur mass insurance sales, ways of cutting the costs of insurance. The price of failure, says Shanks, is the specter of Government encroachment on the industry.
Says Shanks, with a rock-ribbed finality worthy of Gibraltar itself: "The stakes are high, and the greatest stake of all is the preservation of our free capitalistic system. Capitalism makes it possible for us--alone among all the countries of the world--to feed ourselves, finance ourselves, transport ourselves and produce what is necessary. But we must face the fact that capitalism cannot be static. Our capitalism must continue to evolve and develop if it is to meet the ever-changing needs of our expanding society."
* Right behind No. 1 American Telephone & Telegraph Co., with $18.4 billion, and Metropolitan Life, whose $14.8 billion in assets still makes it No. 1, by assets, in the life insurance field.
* Answer: 10(10/2^10)^2 (1-10/2^10)^2 or 1 in 1079.9 times.
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