CASE STUDY
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.
types of risk, etc.) from risk taking (the invest-
ment side of the house). With two distinct
organizations reporting separately to the
office of the chairman, Prudential ef-
fectively separates risk policy, expo-
sure 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 year.
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 usual.”
The effect
was like turning on a
light. The obstacles are a
lot less scary when you
can see, touch and
explain them.
Changing Habits
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-in-vestment-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,
NOTE ABOUT THE CHART
This example presents only selected data about Prudential
Retirement Insurance and Annuity Co.’s (PRIAC) General
Account portfolio. Information is unaudited and prepared in
accordance with generally accepted accounting principles as of
March 31, 2009. Statutory accounting practices can differ from
GAAP. The Connecticut Insurance Department recognizes only
statutory accounting practices for determining PRIAC’s financial condition and solvency. As of March 31, on an unaudited
statutory accounting basis, PRIAC had total admitted assets of
$50.5 billion, total liabilities of $49.3 billion, total capital and
surplus of $1.2 billion, and $361 million of General Account
assets pledged as collateral (excluding amounts held in reinsurance trusts).
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 Services.
