CASE STUDY
Calming the Waters
How full and frank disclosure amid the crisis soothed
investors’ nerves: a lesson in transparency.
BY JAMES MALLOZZI
he 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 retire-ment-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
T
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 investments.
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 past.
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
