We are halfway through 2012 and it is earnings season again. As always, managements and investor communications teams are crunching and drafting to get ready for their respective “big day.”
But remember that investors hear from all companies during earnings season. So, how can your management team be best prepared for its turn in the spotlight – that one hour during earnings season when insurance-investor attention is focused on your company?
Well, insurance companies differ enough that there is no absolute, “one size fits all” recommendation. But I have visited with a number of insurance analysts and investors in recent weeks (and read my share of industry commentary). I believe there are some common themes on the radar screen this quarter.
Before I turn to those themes, I wanted to briefly comment on how the call can be used to best effect.
Where We Are Going Or Where We Have Been?
Bottom line, unless your company is reporting a significant surprise vs. expectations (either up or down), the value of your company’s stock already reflects anticipated second-quarter results; the release and call are just confirmation. Investors spend time on the information to gain insights into what will drive future values of your stock. Also, they are fully aware that we are already about one-third of the way into the next quarter – second quarter is “old news.”
So companies that report results largely in line with expectations can make best use of investor time by using the call to place current results in a strategic context and to discuss business opportunities and direction. I talked about this concept in a post several years ago titled Looking Forward vs. Earnings Guidance.
Conversely, investors generally do not find value in recitations of data that already appear in the news release or other readily available materials. Of course, if the call routinely is the only source of a particular data point, they would expect it to be included in the commentary. But, their attention is likely to wander while those values are read to them. (Investors have access to “real-time” transcripts for most calls – these transcripts are available online even as the call is underway. For data, investors would normally refer to the “written” transcript of the call not their notes.)
What is on the Radar Screen?
I believe the key themes of interest in the second quarter align with their interest in understanding each management’s view of their company’s strategic opportunities and outlook. Insurance investors are very interested in where things may be heading and I sense they believe the insurance industry has reached a turning point, one where they may be able to distinguish the “winners” from the “not winners.”
So what might the focus be?
- Is your company growing in the “right” way? The top line focus may differ based on business mix, but I expect investors will want to drill down to better understand the relative contributions of exposure growth, rate changes or retention levels – and what the trends may indicate for future quarters (for reinsurers, the focus already is turning to potential January 1 renewal pricing levels).
Questions are likely to reflect continued concerns about the U.S. and global economies as well as any company’s risk of adverse selection as some carriers are more firm on rate than others. A sub-point would be underlying policyholder payroll and sales trends, in part to assess economic activity. Further, investors are curious about management’s views on capacity for growth (and the corollary of regulator/rating agency views of that capacity).
- Do you derecho or do you not? SNL reported that U.S. natural catastrophes cost the insurance industry $9.3 billion in the first half of 2012, slightly below the average and well below last year. While that number is large enough that a few property writers will be reporting outsized cat losses, other companies will face questions about their exposure risk going forward and their views of changing weather patterns. If additional storms hit before your company’s call, expect to be asked about them.
- And the biggest elephant of all – what about reserves? For several years, many analysts and investors have quarterly predicted the end was near for outsized reserve releases that drive results. Further, the 2011 statutory year-end loss reserve analyses seemed even more negative than prior years. I have the sense that a growing number of investors believe this upcoming second quarter will be the turning point for many companies. In this context, I believe an older post on reserve disclosure — The Elephant in the Room – One Investor Concern for 2011 and 2012 – remains timely as background.
Of course, the questions asked on any particular call will be very different based on what that company reported, but I think most companies would be well served by sharing upfront:
- Ex-cat accident year vs. calendar year loss ratios (and reasons why current year loss picks are higher/lower than prior years).
- Lines of business and years responsible for any reserve strengthening (or releases).
- Loss cost inflation trends and management’s view of the greatest risks to established reserves in current trends.
A follow-on question might be “how do loss cost trends compare with the last cycle, and what might drive differences, e.g., better data, better disclosure framework, etc.?” Companies reporting reserve strengthening should be prepared for variations of the difficult to answer: “Why should we believe ‘this is it?’” or “How can we be sure you will not be putting up more reserves in coming quarters?”
- Why or why not share repurchase? Investors can be expected to view commentary on share repurchase as a proxy for commentary on management’s attitude about capital levels. Companies that took advantage of second-quarter buying opportunities may be asked whether they no longer see “better” uses for that capital in their insurance operations.
- Is there any place to find yield? It seems to have sunk in – interest rates are not going up soon. I believe investors will ask questions intended to help them reconsider the way they have modeled various insurers investment income for the next year or two. I would not be surprised to begin to hear “What is the average coupon and par value of holdings expected to mature (or be called) over the next 18 months?” The obvious corollary to that question is “Are there any places where you can find replacement yield without inappropriate risk?” Alternatively, companies may be asked to discuss the risks associated with any higher yielding investments made in recent quarters.
- And might you be asked about the latest headline? I think it is virtually a certainty that investors will ask many insurance companies about several of the current “headline” topics, including:
- Are you seeing any wage or commission inflation?
- Have you considered the cost of implementing the Affordable Care Act?
- How might the drought affect your book of business?
- Are you experimenting with any usage-based insurance products? Is this the next “credit scoring” phenomena?
- For D&O carriers — are you exposed to any of the variety of financial institutions in the news?
Of course, the ultimate, but potentially unstated question, would be “How is your company going to generate a competitive return on equity in light of all of these trends?” (growth, current accident-year loss ratios, declining yields, etc.).
In the end, any single conference call is not likely to make or break your investor communications efforts. But a well-conceived call can support the overall investor communication program at a timely juncture for insurance investors by:
- Focusing attention on the company’s strategic direction and placing current results in the appropriate context
- Reinforcing key traits of transparency and credibility
- Offering a forum for those less familiar with the company to gain confidence in the company and management