• 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

An Update On Municipal Bond Disclosures

As we move through year-end reporting, municipal bond portfolios generally seem to be holding up better than expected. But insurance companies still may want to consider ways to help investors understand the exposure their portfolio has to this sector and the risk associated with the holdings.

Comments made on this topic during Traveler’s (NYSE:TRV*) fourth-quarter call by Jay Fishman, Chairman and CEO, put the challenge in context.  As taken from the SNL transcript of the call, he noted:

“…  there seems to be this bias amongst even sophisticated people to view municipal securities are all the same, as if somehow we own some prorated share of an aggregate monolith marketplace and that’s just not the case. Everyone understands that in the taxable fixed income world, the issuer and the specific terms and conditions of the instrument matter, and that’s equally as true in the municipal arena. …”

Travelers went on to discuss how they build their muni bond portfolio and how they view it, offering a model other insurance companies might consider adopting. They provide useful metrics in a supplemental presentation (see pages 22 and 23).

Even companies that already have released earnings might benefit by adding color to the discussion of their municipal bond portfolio in their 10-K.

* Note: InsuranceIR does not have a business relationship with Travelers

Say-On-Pay Reputation Risk for Insurers

(Actually, the potential for reputation risk may exist for all publicly traded companies with investment operations, but there may be different aspects to take into consideration for different industries.)

As has been widely reported, the SEC yesterday finalized its rule titled “Shareholder Approval of Executive Compensation and Golden Parachute Compensation,” better known as Say On Pay. The entire 152-page rule is available here, and the SEC’s summary and fact sheet here. Law firm WilmerHale has posted one of many available summaries here.

The rule affects companies in every industry; insurance companies aren’t treated any better, or any worse, although smaller reporting companies are exempt until 2013.

But there’s one interesting twist for companies that file 13-F reports with the SEC regarding the holdings in their investment portfolio.  The Dodd-Frank Act required those 13-F filers — a classification that includes most insurance companies — to annually disclose how they voted on say-on-pay and golden parachute matters for holdings in the portfolio.

Although the final rule issued yesterday does not yet address this requirement, I encourage insurance companies to keep this in mind as proxies are voted by their investment operation. I have seen one report that the SEC indicated in their open meeting yesterday that they would address this topic in the coming month.

This rule could expose insurance companies to “reputation risk” if their investment team votes proxies for say on pay in a fashion out of line with the board and management’s stance on the company’s own corporate governance.  I suspect the most likely disconnect would reflect a company:

  1. Recommending to its shareholders that say-on-pay voting occur every three years while
  2. Voting proxies for holdings in its portfolio for say-on-pay voting to occur every year, regardless of the recommendations made by the respective companies’ boards.

It’s akin to “do as I say, not as I do.”  It will be interesting to see how the SEC shapes these reporting rules.

Do Investors See Risk in Your Muni Portfolio?

On June 13, 2010, The Wall Street Journal commented that many municipalities continue to struggle financially, creating risks in the $2.8 trillion municipal bond market. (According to the article, municipal bond prices aren’t yet showing signs of investor concern.)

With few exceptions, property casualty insurance companies hold municipal bonds in their portfolios, in part because many of these bonds are tax advantaged.

With the concerns published widely, insurance companies may want to be ahead of the curve on this topic in their upcoming disclosures and be ready to answer related questions.

Potential additional disclosures include:

  • Separating the breakdown of fixed-maturities portfolio ratings into municipal bonds and corporate bonds (often the information is presented on a consolidated basis).
  • Providing the insured and underlying ratings distribution.
  • Giving details on the geographic distribution of municipal bond holdings.
  • Identifying the portion of the municipal bond portfolio carrying a split rating (different ratings by two or more major rating agencies).

For question and answer sessions, companies can be prepared to describe the actions they have taken to reduce risk in this portion of their portfolio and gather data on holdings they retain in municipalities deemed at greater risk, e.g., Jefferson County, Alabama, or Harrisburg, Pennsylvania. Further, investors may be interested in the qualitative screens used to build the portfolio, e.g., bonds supporting essential services.

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