• Why Investor Relations?

    For more than 40 years, the CFA Institute has advocated for efficient capital markets that are ethical, transparent, and provide investor protections. One of the Institute’s guiding principles states: “Investors need complete, accurate, timely and transparent information from securities issuers.”

  • Why InsuranceIR?

    Insurance companies face unique challenges when communicating with investors and InsuranceIR is uniquely suited to help with industry-specific support.

    The primary purpose of this blog is to offer specific ideas on how insurance companies can achieve that objective.

    The supporting pages offer information on InsuranceIR's capabilities and how firm principal Heather J. Wietzel can help your company improve your investor communications.

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  • Copyright 2012

Can We Talk … About Reserves

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.

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AIFA and the Economy

It should come as no surprise that the outlook for the economy was top of mind at the AIFA conference.

I heard a number of investors ask open-ended questions aimed at assessing management’s overall level of optimism about 2010 and beyond, which I view as a good sign. Those questions were looking for insight into both insurance operations and the investment portfolio.

On the insurance front, questions about the economy’s effect on pricing and exposures are sure to continue. Here are a few other topic areas that may generate questions in the coming months:

  • Inflation trends, specifically related to setting and evaluating reserves.
  • Relationship of the “side effects” of economic weakness to potential loss trends. For example:

Effect on frequency of deferred maintenance by policyholders or

Effect on severity as the “less experienced” return to the workforce.

  • Underwriter compensation, which leads to two very different follow-up questions:

How underwriting discipline is monitored or

How a company retains underwriters when their compensation drops because of the formula used.

Beyond the economy, discussions at AIFA confirmed that investors are looking at the potential risks of the changing judicial and tort environment. I looked at the communication implications of tort (un)reform after the NYSSA Insurance Conference in February.

I hope these ideas are helpful. I will be adding detailed posts on a few other topics in the next several days.

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