• 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

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.”

Stand Out by Looking Ahead

I kicked off September with a trip to New York to attend an investor conference, where I had the opportunity to listen to a number of insurance company presentations. I also visited with several other analysts. (It’s always good to see industry and investor friends, thanks to all!)

Attendance at the conference was excellent, despite the holiday week timing, which is good news for the industry. But I saw continued uncertainty, with investors appearing even more pessimistic than two months ago about the near-term outlook for the industry as a whole. For example, surprisingly few managements were asked about the pricing environment. And when asked, the questions seemed pro forma, as if investors didn’t really expect to hear anything new or upbeat about commercial or E&S pricing trends (the overall view of personal lines remains a bit more favorable).

That said, the continued interest in insurance stocks argues that all is not lost and that this is the time to step up outreach to investors, not cut back.  (Three out of four U.S. property casualty insurance companies are trading at a discount to book value, one can argue that some must have favorable prospects.)

There is no one-size-fits-all solution to translate investor attention to action in this market (making it difficult to make recommendations here that are appropriate to all situations). But investor needs generally are best met by clearly and credibly articulating the business strategies that will differentiate a company’s business in years to come. To meet that need, I recommend shaping communications around the strategic plan (appropriately modified for competitively sensitive information), supported by the metrics used to measure the success of the initiatives.

The need for this type of forward-looking communications exposes a message weakness for many insurance companies. Managements often seem most comfortable explaining how they have gotten the company to where it is today, describing successes in very different insurance and investment environments. Investors may listen politely, but that focus is not the best use of their time, or management’s.

Be Forthright to Counter Prevailing Mood

My trips to New York and Chicago over the past two weeks included visits with four industry sell-side analysts (thanks to each for their time).

I also attended Cagney Network’s 2010 Insurance Round Table along with buy-side investors and others with industry or consulting roles.

As I look through my notes, I see only one common theme — uncertainty.

Regardless of background, no one seems to have confidence in the economic outlook.  Those in the financial markets seem the least optimistic.  For the property casualty insurance industry, most see intermittent positives in some business lines. With a few interesting exceptions, most also see some event that dramatically reduces capital as the only way to end the current soft market.  (And no one seriously wants an event of that magnitude because of the human cost!)

Realistically, there are only a handful of companies that might be able to individually reverse the current mood.  I see many of the remainder very tempted to “fly below the radar” until the mood changes.

My advice — don’t.  There is no advantage in letting your company become one more source of uncertainty, even if the going is tough.   Better communications isn’t a way to mask weak performance. But better communications can be used strategically to reduce uncertainty and to bolster management credibility, arguably a company’s most important intangible asset. For those reasons, I recommend that companies:

  • Become more transparent – Give new insights into your long-term business strategies and decision-making
  • Add to your disclosures – Provide more detail (and data) on the drivers of your current results and sources of future opportunity
  • Make management more available – Let more investors hear directly from your leaders
  • Share your vision – Help investors see how the company might perform under best-case and worst-case scenarios and how it is differentiated in the market

Market Demographics May Support Your Case

So far, first-quarter releases and calls are rolling out in fairly orderly fashion with the biggest question being whether reserve releases are realistic and the biggest debate being whether some companies should have pre-released their catastrophe losses (and not “missed” consensus). Reflecting conversations with a few analysts over the past several weeks, I’m planning to look at the “to pre-release or not” topic for insurance companies in time for consideration for the second quarter.

In the meantime, I was reminded by an SNL marketing email of one valuable way insurance companies can address another topic — helping investors see their potential as the market hardens. SNL is promoting their “Market Demographics” template. According to their email, it’s a “pre-built model” that let’s you “view comprehensive data on key demographic indicators, including population, median income, home value and unemployment” by state, county or MSA. In other words, they are making it easy to do useful research.

The economic recovery is expected to be a major factor in the return to premium growth. But not all markets are equal and supporting your company’s specific plans with market data can help make your case.

For example, when talking about geographic expansion, population growth is expected be above 7% over the next five years in Arizona, Georgia, Idaho, Nevada, North Carolina, Texas and Utah (compared with a 4.6% average for the U.S.). If these are your target states for expansion, you may be able to bolster your case for your outlook.

Or you may already be seeing growth in some states (supporting lagging results in others). You could make a case that you are seeing quality business opportunities if the growth was in Hawaii, Iowa, Kansas, Louisiana, Nebraska, New Hampshire, North Dakota, Oklahoma, South Dakota, Utah and Vermont. In those states, March unemployment was below 7.5% compared with a 9.7% average for the U.S. This type of data also may add color to discussions of audit premium trends.

* InsuranceIR LLC purchases SNL data services 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 $500 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.