• 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

FYI — NYTimes — Irene Adds to a Bad Year for Insurance Industry

Irene Damage May Hit $7 Billion, Adding to Insurer Woes – NYTimes.com — This New York Times story provides an interesting recap of the disaster-related losses the insurance industry has faced in 2011, and how 2011 compares with earlier years.

I also think it serves as a useful reminder that a common investor view of catastrophe events — as a potential catalyst for price firming — isn’t necessarily the view taken by the property casualty industry’s other constituencies (policyholders, regulators, communities, employees, etc.).

Insurance-sector investor relations teams are well served by keeping the reality of integrated communications in mind when preparing materials for investor audiences.

Cycle? What Cycle?

I’m back from last week’s NYSSA Insurance Conference where I listened to 16 presentations from a cross-section of small- and mid-cap insurance companies. It was a great opportunity to spend time with corporate and investor friends, both at the conference and socially.

Since my return, I continued to listen to fourth-quarter conference calls and read some of the related research as I mull the investor relations implications of what appears to be a shift in investor thinking on the insurance sector.

What is Changing?

From what I’ve seen and heard, I believe that insurance-sector investors are concluding that the pricing cycle has been “broken” and that a broad-based insurance-sector recovery is unlikely in the next few years.

Investors who have decided the cycle is broken can be expected to move their primary focus away from attempting to determine the timing of sector changes.  They are more likely to focus on determining which companies have the business model to survive (and prosper) with pricing at current levels. They will be most interested in the characteristics that distinguish each company and on how management will achieve improved return on equity and growth in book value through its own actions and choices.

Regardless, for investor relations purposes, it doesn’t matter if the pricing cycle is really broken or not, what matters is investor perceptions and related information needs. (And whether the cycle is actually broken is well outside the purview of this blog.)

Why Did I Come to This Conclusion? Continue reading

Managing the Message — Insurance-Sector IR

Yesterday SNL Financial* hosted a webinar titled “Investor Relations for Insurance Companies – Managing the Message.” For the discussion, Jean Peters and I shared our perspectives on the challenges faced by insurance-sector IR teams and how to overcome those challenges. We talked about shaping the company’s message to meet investor needs  and about attracting and retaining the right investors, with the ultimate goal of increasing company valuation.

Jean is Managing Director for Golden Seeds LLC and formerly Senior Vice President – Investor Relations, Corporate Communications and Strategic Planning for Genworth Financial.

The slides are below. A replay of the webinar will be available on6 the SNL website.

* Full Disclosure:  InsuranceIR LLC purchases data services from SNL Financial and participates in their “IR Partner Program.” Under the terms of that program, any company that contracts for services from SNL based on my recommendation receives a credit on their initial bill. InsuranceIR does not receive any cash compensation for referrals. By participating in various marketing activities with SNL, I may receive non-cash benefits, such as higher visibility.

Pre-release WITHOUT a Surprise?

All too often, the pre-release is only pulled out of the IR “toolbox” when it looks as if results will be below expectations, or a surprise to investors. Pre-releases are valuable for that use, as I discussed last June.

But a pre-release might be even more useful when there is no surprise and it can reinforce that a company’s strategies for valuation creation are working.

The arguments in favor of giving investors a preliminary look at in-line results are unusually compelling this year-end. I suggest insurance companies give serious consideration to a pre-release during January, particularly companies that will be presenting at conferences before their release date.  (We can leave for another day the discussion of whether companies should pre-release information every quarter – and what signals might be sent with pre-release timing.)

So what are my rationales for recommending pre-releases this quarter?

Investor Concerns

Insurance investors are very worried about a number of issues that they believe may lead insurance companies to report results below expectations. From my conversations with the analysts, and what I’ve read in the published research, the three that they consider most likely for year-end are:

  • Unusual weather losses (or catastrophe losses for companies with international exposure)
  • Swing from favorable to adverse development (discussed at length in my post “The Elephant in the Room”)
  • Portfolio weakness (in both the equity and bond portfolios), leading to lower book value

And since those are very real concerns, some companies are likely to report results that have been affected by one or more.

For companies that are not being affected by these issues, putting early commentary in investor hands may help avoid being grouped with peers reporting weaker results!

Mindshare

Also, insurance companies – more than ever — need investors to understand the underlying fundamentals of their business – the strategies that will allow the company to excel in all markets. While the financial results are the “scorecard” of a company’s strategy, the numbers alone rarely give the additional insight that allows investors to identify those companies that may deserve a premium multiple.

But a quick look at the SNL calendar shows that about 60 insurance companies have already scheduled their earnings release and call for the first three weeks of February. During those weeks, the numbers often will take a front seat, and in depth attention will be given first to those companies reporting out-of-line results

For companies with in-line results, putting the commentary in investor hands before the crush of year-end reporting may improve mindshare – more important this year than ever!

So, What Should the “No Surprise” Release Say

Pre-releases – for any purpose — are entirely custom. There are no strict rules for the form or content, in fact there really aren’t even any specific expectations. They clearly are distinguished from earnings releases because they rarely have extensive tabular data. And the financial values that are included usually are described as “preliminary” or given in ranges (e.g., between $10 and $15 million).

For the “no surprise” release, I believe the content should parallel the commentary that an insurance company CEO would give on the quarterly conference call. In a series of quotes from management, the pre-release should summarize the (preliminary) results in the context of the company’s business strategy.

Alternatively, the content could parallel that planned for the Executive Summary of the MD&A. In an interpretative release that discussed the use of the Executive Summary, the SEC included this statement as part of its comments:

“A good introduction or overview also would provide insight into material opportunities, challenges and risks …

  • on which the company’s executives are most focused for both the short and long term, as well as
  • the actions they are taking to address these opportunities, challenges and risks.”

In my view, that’s a pretty good description of what might appear in the pre-release!

For Insurance Companies: Managing the Message Webinar

Please join me on Thursday, January 20, from 1:30-3:00 p.m. ET for a (free) SNL Financial* webinar titled “Investor Relations for Insurance Companies – Managing the Message.”

For this webinar, I’ll be part of a panel discussing the challenges faced by insurance-sector IR teams and how to overcome those challenges through a program to attract and retain the right investors, with the ultimate goal of increasing company valuation.

(Also, the webinar will provide CE credits for the CFA Institute and National Association of State Boards of Accountancy.)

* Full Disclosure:  InsuranceIR LLC purchases data services from SNL Financial and participates in their “IR Partner Program.” Under the terms of that program, any company that contracts for services from SNL based on my recommendation receives a credit on their initial bill. InsuranceIR does not receive any cash compensation for referrals. By participating in various marketing activities with SNL, I may receive non-cash benefits, such as higher visibility.

What’s an Insurance Company To Do?

We’re entering another quarterly reporting season and it continues to feel as if every glimmer of good news for the property casualty insurance market is offset by something in the bad news column.

So, (from an investor relations perspective) what’s an insurance company to do?

In my opinion (and there’s research to support this view), the greatest potential upside lies in doing even more to educate investors about your company’s strategy. Better communication isn’t a way to mask weak performance. But better communication can reduce uncertainty and bolster management credibility, arguably a company’s most important intangible asset (see “Be Forthright to Counter Prevailing Mood” for more on this concept).

To get the “educating” ball rolling, here are some ideas for consideration:

  • Premiums – Not all geographies and industries are equal in this economy. Help investors understand your company’s business by distinguishing its markets. Consider highlighting lower-than-average unemployment in your company’s key states or relevant trends in targeted industries. This post gives a few other ideas.
  • Inflation/deflation — Be ready for questions about inflation/deflation. Be prepared to talk both about how these trends might be affecting reserving for current losses and whether a change in your company’s inflation expectations has been a driver of reserve releases for recent accident years. (Also, be set to discuss the potential effect on your company’s investment results.)
  • Judicial climate – Six months ago, I talked about medical malpractice carriers being asked about “slippage” of tort reform in various states. The questions focused on pressure on awards and settlements (longer term) and defense costs (shorter term). In recent months, I’ve started to hear similar questions asked of insurers with broader commercial liability exposure.
  • Reserves – This is another topic I’ve addressed before, but insurance investors need to understand reserve trends to be confident in a company’s strategy. This April post offered a summary of potential disclosures.
  • Muni portfolio – Investors are still sensitive to the default risk of some municipalities. Last quarter, I talked about data companies might consider making available to investors to mitigate their concerns.

These ideas offer a starting place for most property casualty insurance companies.  I would welcome the opportunity to discuss specifics ways in which your company could help investors better understand its business strategy.

Looking Forward vs. Earnings Guidance

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.”