My apologies for the length of this post, but this topic is too complex to lend itself to a “short” entry.
Insurance company managements regularly face the decision of whether or not to comment ahead of a regular release date on some item that will cause results for a particular quarter to fall below those previously anticipated (there is an occasional need for an upward adjustment).
The most common topic is catastrophe losses that have risen above a stated expectation, historic average or other measure (this quarter looks like it’s going to be another tough one for weather). These are often released early because one quarter’s catastrophe losses generally give little insight into a company’s long-term outlook (unless that single quarter turns into a quarter-after-quarter stream of higher-than-anticipated losses that indicate poor risk selection, geographic concentrations or other business concerns).
For insurers, another common pre-release subject is externally driven changes in portfolio values, particularly when they may lead to other-than-temporary impairment charges, Regardless of topic, the estimate generally is given as a range to acknowledge the uncertainty of early data.
The format normally is a news release that gives investors the background of the situation and the range of estimates for the measure under discussion. Even companies that do not give formal earnings guidance work within some framework of expectations and can benefit from a pre-release.
After conversations with a few investors who believe that companies benefit when they issue pre-releases, here are some thoughts for consideration (I would be pleased to discuss the topic with you directly in more depth):
- What’s the appropriate threshold for a pre-release? – The most commonly cited threshold is “materiality,” or something the typical shareholder would consider important. I find this is easier to determine in hindsight. A bright-line measure, such as the frequently quoted 5% of earnings or equity, can be limiting.
For most situations, I believe the best result weighs the potential for investor distraction from your company’s strategic message and the potential reputation risk across all constituencies, each discussed below.
Understanding investor perceptions of your company can help guide the decision. Companies can gain the benefits of pre-releasing even if the measure falls below the traditional thresholds.
- Pre-releases let quarterly reporting focus on what’s important – the longer term! – Non-strategic adjustments tend to turn entire quarterly conference calls into a dialog on short-term performance. Getting the clutter out-of-the-way, in advance, let’s you stay focused on your company’s long-term objectives, your business strategy and your opportunities, topics that are good uses of management time with investors.
- What about the risk of getting the estimate wrong? – This is a reputation risk that is real but can be minimized. Investors do tend to remember bad estimate (and subsequent releases to update the original range) much longer than they remember on-target reports.
If circumstances dictate an announcement before the estimate has firmed up, tactics to minimize the risk include using a very broad range, promising a further update or holding a special conference call to help investors understand the reasons for the uncertainty.
A similar issue is the need to do multiple pre-releases in a single quarter because of additional events (ones that occur after the first announcement). Unless the pre-release timing is dictated by other circumstances, this risk can be mitigated by issuing the pre-release late in the last month in the quarter. This gives investors sufficient time to react but minimizes the time frame in which another event might occur.
Catastrophe loss pre-releases also can give more cushion by looking beyond the event estimate with language such as, “In light of ______________ and the potential for further weather events during the rest of the period, management believes this quarter’s catastrophe loss ratio could rise as high as … .”
- Pre-releases minimize the risk of a “missed estimate” headline and the subsequent trading volatility! – Even if it isn’t a perfect solution, a well-crafted pre-release is the best way to avoid headlines that read “XYZ Company Misses Street Estimate …” and the subsequent price movement! (If a company doesn’t pre-release when appropriate, the consensus estimate is virtually certain to be wrong.)
Of course, there’s almost nothing worse than getting accused of missing the consensus estimate when reported results track exactly with what was pre-released.
Managements find this very frustrating and as an IR pro, I agree that this one hurts more than most. When companies do their job, being transparent and providing investors with additional insight, they should be able to count on the analysts doing their jobs (and most do).
Companies can lower this risk by getting pre-releases issued well before earnings season kicks off (when analyst time becomes a precious commodity). Further, companies should contact each analyst directly once the news is public to make sure they have seen the announcement. Companies also can help make updating simple for the analysts by providing the estimated data in forms that easily compare with the catastrophe losses (or other item) contained in the models.
Managements that make appropriate use of pre-releases are making it clear that they are committed to transparency, that they respect their followers and that they understanding how surprises make everyone’s life more difficult.