First, to get it out of the way, is that the regulators wanted to sign off with a bang, given the imminence of its demise. That might have something to do with the timing though not the decision.
So how did Prudential – a name synonymous with probity, morality and fair play – get into its present problems?
It is said a man is judged by the company he keeps. A company is often a reflection of its chief executive. Prudential, for a quarter of a century, has been ill served by its chief executives. They have all sought to transform a company that is built to be a long-distance runner into a sprinter. Why not take Mo Farah for what he is, rather than trying to turn him into Usain Bolt?
It started with Sir Brian Corby’s decision to move into estate agency. That was a mistake that was put right by his successor, Mick Newmarch. To be fair to Sir Brian, he made sure he did not use policyholders’ money.
Legacies
Mr Newmarch in some ways was unfortunate. He inherited the estate agency problem and quickly got shot of it. He also inherited that pensions misselling problem. Either he was badly advised or he did not heed the advice he was given.
After a succession of chief executives who oversaw an attempted merger with American General and a focus on the Far East, we reach 2010 and the proposed takeover of AIA, the Asian subsidiary of AIG. Tidjane Thiam, erstwhile finance director, was chief executive.
He was recently interviewed on Desert Island Discs. It was strange to hear him not for what he said – which was all good stuff – but usually people go on such programmes at the end of their career.
But I did get the impression he was a very bright man who did not suffer fools gladly – someone who thought through his actions carefully and once he had made up his mind would take the shortest route to execute his decisions. That is at the root of the problem for which the FSA has fined Prudential.
Modern financial conglomerates are inherently unstable. AIG fell over because of its London operations, Barings because of its Singapore office. If Prudential, based in London, has its major operations in the Far East, risk management becomes a huge issue.
The FSA’s concern would be not just capital adequacy but management neglect. Who would want to take responsibility for running the UK operation when the sexy thing – the chief executive’s plaything – is the new acquisition? Put another way, if he was minded to bend the rules, would you find out in time?
The FSA is well aware of what happened when the Pru recruited Mark Wood from Axa to head Prudential UK & Europe, while Jonathan Bloomer concentrated on overseas activities: chaos reigned in the UK. Readers will remember Prudential cutting critical illness rates just as its competitors and reassurers were raising theirs. The company ended up cornering the market. To its everlasting shame it reneged on the deal.
Prudential’s UK operations require careful management. Much of its new business is annuities, which has two key risks. The first is longevity risk. Although there are assets available to lay off some of it, the counterparty risk cannot be underestimated. The second is asset default risk – a non-trivial risk, not just with corporate bonds but also sovereign debt, as holders of Greek bonds have discovered.
Lurking ahead is Solvency II, which is likely to require larger amounts of capital for the annuity business, reflecting the additional risk.
For these reasons it was imperative the FSA was kept in the loop. The risk profile of the combined entity would be quite different to the Pru before the deal. The regulators would wish to know such risks were adequately understood and protections put in place, both in terms of capital and risk management.
Equally important is that if the chief executive decides the regulators are a nuisance rather than an ally, what will he do next? Think of life companies that have failed and think of their chief executives. The censure of Mr Thiam is a warning to him and a message to his board.
Icki Iqbal is a fomer director of Deloitte
