More than half of the NYSSA presenters talked about a return on equity target. But several presenters faced follow-up questions about the effect of lower investment yields on their ability to achieve their ROE target.
Under normal circumstances, I would applaud companies who choose to talk about an ROE target. Generally, I view providing management’s long-term performance targets as key to the strategic message a company shares with its investors. (Please don’t confuse long-term targets with short-term earnings guidance. Guidance is a different topic altogether.)
But I think the follow-up questions at NYSSA showed that investors have identified a “weak link” in the current messaging for insurance companies. Companies should be aware of this concern because of the potential for it to hamper management credibility.
At this point in the insurance and financial market cycles, I would counsel companies to proactively comment on:
- Current and historic contributions to ROE of insurance and investment operations.
- Distribution of the long-term target between insurance and investment contributions.
- Potential effect of a lower investment yield for the short to midterm.
- Near-term portfolio and capital management plans (investment allocation, duration, repurchase, etc.) with some discussion of the potential effect on yield or investment leverage.
In a future post, I may talk about how companies can use communications to address investor concerns about their ability to achieve the operating side of their target. But that’s for another day (maybe after AIFA).