The steep drop in the markets last year ended "business as
usual" for financial services companies. Among other things,
longstanding relationships between fixed-income, stable-value
clients and their providers became strained by detailed, probing
questions about the assets supporting guaranteed products.
That meant the curtain also fell on the "everything is fine" era
of financial disclosure to retirement plan sponsors. Nearly every
financial institution faced the same problem of effectively
communicating complex and detailed financial data to clients who
demanded to know exactly where they stood.
For years, disclosure by insurers managing conservative,
fixed-income accounts for retirement plans essentially entailed
announcing the new guaranteed interest rate along with a reassuring
message about the company's financial strength and stability,
underscored by ratings agencies and tons of dense financial data.
Prudential, for example, filed annual listings of the assets in its
general accounts, which support its stable-value products. But the
information was unavailable until well after year-end and not
updated for another full year. The sheer volume of undigested data
-- as many as 20,000 separate portfolio holdings in some cases --
was simply overwhelming to clients.
At the core is the connection between institutional
retirement-plan clients and their stable-value provider, a
relationship of trust based on a proven track record and expertise.
In addition, insurers provided reassurance of their financial
strength through the quality of their portfolios and
investment-grade fixed-income securities and the guarantee of a
rate-of-return backed by their full faith and credit. While
investment houses that provide other types of investments for
retirement plans (such as mutual funds) can point to share price
and net asset values and provide quarterly reports to equity
analysts, fixed-income investors have traditionally been given far
fewer metrics to assess the strength and health of their
In fall 2008, tensions finally erupted after building up in
capital markets for months. The risks of both equity and
fixed-income investing were revealed in ways most of the world had
never seen. The pressure on the industry was unprecedented. Many
firms' senior debt and financial strength ratings were under
pressure from the ratings agencies, with many seeing downgrades.
Daily calls to my firm's retirement call center exceeded 10,000 at
the height of the crisis -- about twice normal volumes -- and most
involved detailed, time-consuming conversations.
Clearly, vendors of stable-value products needed a way to engage
in a more fact-based, substantive conversation with clients about
what had traditionally been a relatively worry-free investment
option. Plan sponsors were extremely concerned about the risks they
might be facing and, as a result, were asking serious and
unprecedented questions about stable-value products, looking for
more -- and better -- responses than had sufficed in the
The most effective answer was to communicate with clients
directly, providing a full, transparent and accessible articulation
of the facts. Given the new needs of the marketplace and existing
clients and advisers, Prudential set out to deliver significant,
additional details about the portfolios' liquidity,
diversification, collateralization and overall strength, organized
in a way to specifically, yet easily, address clients' questions.
We decided to produce a new set of periodic reports for customers
and their advisers that would:
- Describe our approaches to risk and investment management.
- Provide a new, fact-based and structured view into the details
of our general account portfolios.
- Outline in detail our approach to asset and liability
management as well as strategic and tactical asset allocation, with
holdings quantified, categorized, and presented by type, asset
class, industry, investment grade and region.
The clarity and fact-based nature of this information would be
strikingly different from the often emotional and speculative
reporting that many clients were seeing in the media. This sort of
detail wouldn't be amenable to five-second sound-bites nor
immediately apparent from a dense and essentially unstructured
listing of 20,000 individual holdings. In short, we took
information that was overwhelming and not terribly helpful and
recast it into useful, easy-to-understand segments and
At the end of October 2008, after securing
approval from the company's top leadership and risk management
committee, about 25 people in a Prudential Retirement working group
-- from marketing to legal to compliance to investment-management
and finance -- effectively took on second jobs for six weeks,
including nights and weekends. Their charge: Prepare the new
portfolio reports for Prudential's general accounts and make sure
that the end product would be easy to understand but also
sufficient in quantity, facts, and details to help sponsors become
more comfortable with their plans' guaranteed and stable-value
The first reports, for the third quarter 2008, were finished in
early December. Copies were distributed, with a separate narrative
"Guide to the General Account" and a Q&A document, to all
institutional clients and to plan intermediaries and advisers. The
result? Clients reported that the new reports were an effective
response to the extraordinary crisis everyone was witnessing, and
the new documents have subsequently become the foundational tool
Prudential uses to engage clients in conversations about
In a live webinar produced to share the new reports, some 800+
clients and advisers logged on from across the country and
submitted 66 questions, which were subsequently answered in writing
and provided to all clients and advisers, regardless of who had
asked the questions. The information and live webinar dealt so
effectively with the concerns and issues that fewer than 200
clients and advisers logged on for the webinar covering fourth
quarter reports, and there were only four questions.
A sample chart in one of Prudential's General Account guides
informed clients and advisers at a glance that turmoil in the
equities market had little direct impact on the overall portfolio.
In subsequent charts, sub-segments of the total portfolio are
addressed individually, with key underlying data such as
debt-service coverage and loan-to-value ratios highlighted.
Clients and advisers had absorbed the investment rationale,
approach, and details, and had been reminded that facts are always
more relevant and important than headlines. Those regarding failing
subprime mortgages, for example, were addressed when clients
readily saw that the General Account's exposure to asset-backed
securities collateralized by subprime mortgages was a quite minor
and manageable portion of the total portfolio.
Despite the pressured environment and the short timeline to
create the new reports, we were able to rely on a strong financial
and reporting infrastructure to create the new documents. The
financial and reporting professionals at Prudential provided
guidance, data, commentary and review for the new reports on our
General Account portfolios. To be sure, there were significant
differences between the work these teams normally focus on and the
new reports we were creating, but those differences paled in
comparison to our highest goal: that the reports be comprehensive
and accurate and stand up to the most intense scrutiny.
In the process of developing the reports, one of the first
questions we addressed was, among the myriad options, what to
include. To allay clients' concerns, we decided to go to the heart
of the matter by delivering portfolio detail on securities
composition by industry, credit quality, diversification and
holdings by asset class, levels of capital and, for
real-estate-based securities, by region and property type.
We determined to meet head-on the portfolios' exposure to assets
perceived to be of higher risk, including commercial and
residential mortgage-backed securities, below-investment- grade
fixed-income holdings and subprime mortgages, giving year-over-year
comparisons for each asset class in both GA portfolios.
Overall, the firm described its conservative approach to risk
management over many years and its broad experience in public
fixed-income securities, private placements and commercial mortgage
loans. The reports also highlighted how the company deliberately
separates risk management (decisions about exposure limits,
investment guidelines, types of risk, etc.) from risk taking (the
investment side of the house). With two distinct organizations
reporting separately to the office of the chairman, Prudential
effectively separates risk policy, exposure limits, and guidelines
from the actual management of the assets and liabilities, the
risk-taking part of the organization.
For clients and their advisers, the effect was like turning on a
light in a darkened room. The obstacles are a lot less scary and
dangerous when you can see, touch, and explain them.
A second and third set of reports, for 4Q08 and 1Q09 results, went
out in April and July 2009, respectively. Client reaction was so
low-key that we decided to scale back the reports to twice a
The lesson from this initiative -- about the importance of
transparency and accessibility during a time of crisis - was a
powerful one. The new level of openness helped restore calm and
provide comfort to clients and their participants.
The market has kicked the tires and made its judgment. So now it's
back to business . . . though probably never again "business as
James Mallozzi was senior vice president and head of the
institutional solutions group of Prudential Retirement, based in
Hartford, Connecticut, until October. He is now chairman and chief
executive officer of Prudential Real Estate and Relocation