In yesterday’s post, I talked about the importance of looking forward in communications with investors. It occurred to me that a brief clarification would be useful.
All investors are evaluating the future potential of companies they are considering, whether or not the management talks specifically about the future. For property casualty insurance companies, investors want to understand how the company will increase book value over time, which means they need to assess the outlook for both insurance operations and the investment portfolio.
I believe management greatly improves an investor’s ability to assess the future by:
- Articulating the strategic initiatives being employed to position the business for success
- Discussing the best and worst case scenarios envisioned under the plan and
- Providing interim updates on metrics used internally to assess progress
As one example, I encourage you to look at the investor communications made available by RenaissanceRe Holdings Ltd. In my view, they do an excellent job presenting their business strategy. (Note: I am using RNR as an example because I do not have a relationship with the company.)
While articulating management’s vision provides important insight for investors, it is entirely distinct from providing “earnings guidance,” or specific targets for selected financial measures. (Targets are most commonly given for net and operating income as well as for key earnings drivers such as the premium growth rate and the combined ratio.)
In my opinion, providing earnings guidance is actually less valuable to investors than insightful qualitative information. This view was supported by investor comments in Rivel Research’s “2009 Perspectives on the Buy-side,” which noted:
“Indeed, guidance is now more about intangibles and effective, clear communications than it has ever been before – showcasing the persuasive importance of transparency. Providing qualitative insights into the business strategy is the kind of guidance which reigns supreme during the present market turmoil, outranking revenues, margins and earnings.”
Finally, the SEC has long encouraged companies to look forward in their communications. For example, in an extensive Interpretative Release issued in 2003, the commission said:
“Throughout MD&A, including in an introduction or overview, discussion and analysis of financial condition and operating performance includes both past and prospective matters. In addressing prospective financial condition and operating performance, there are circumstances, particularly regarding known material trends and uncertainties, where forward-looking information is required to be disclosed. We also encourage companies to discuss prospective matters and include forward-looking information in circumstances where that information may not be required, but will provide useful material information for investors that promotes understanding.”