This time of year, sell-side analysts issue a stream of reports reviewing year-end Schedule Ps. While each company’s situation is unique, the reports hint at the types of information investors will be seeking on the upcoming quarterly conference calls. Further, there is growing consensus that 2010 will be the year in which many companies tap out reserve redundancies that have helped to offset weakening current accident year results.
After speaking with a number of analysts, I believe companies shy about addressing reserve activity in the interim quarters of 2010 may face negative consequences. Investors may misinterpret a lack of detail as masking worse-than-anticipated deterioration of current accident year loss ratios.
Managements have their best opportunity to shape the interpretation of key points when the reserve information is provided in conjunction with the quarterly release and call. Quarterly snapshots can be volatile, particularly for smaller lines and more recent accident years. But this year, in particular, there is the potential for greater benefit from enhanced transparency than risk from inadequate disclosures.
The simplest way to bolster investor understanding of your company’s reserve activity is to disclose quarterly paid losses (cash out the door on claims), possibly even for each line of business. Investors can use the ratio of paid losses to incurred losses to approximate reserve trends.
But investors really want loss data by current and prior accident years, preferably for each line of business. While you can provide this information verbally during the conference call, investors would most appreciate a written disclosure (ideally as an Excel file available on line). Further, investors want management to be prepared to discuss and quantify which accident years are driving reserve changes.
Companies that give these details, but wait until a 10-Q filing that occurs days after the conference call, should consider providing the information in the quarterly news release so that management can help investors interpret the data.