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P&C call sentiment: Management’s carefully tailored perspective

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For those readers outside of New York, let us tell you about Mets fans.

They fall somewhere between masochistic and naïve. After consistent poor performances on the field, peppered with the occasional hopeful start and subsequent implosion, it gets hard to keep saying “ya gotta believe”. But, year after year, they keep getting excited, going to games and yelling at the players from the promenade.

No matter how badly they do and how much fans criticize boneheaded management decisions from the front office, they never let it sour their love of the sport or the team. Fans can be (and often are) critical, but they never stop believin’.

There’s a fine line between being critical and cynical. That lesson holds water all the way from the Citi Field dugout to the c-suites of major insurance carriers.

Investor relations teams ensure that company messaging leaves investors critical rather than cynical and doesn’t cause any unwarranted fears. They review the prepared remarks, parse for overly positive or negative language, and rehearse with management teams.

At times, trying to get anything meaningful from the carefully manicured language can be a challenge. What happens behind the scenes can be very different than the image management exudes during scripted earnings calls.

But despite these efforts, we’ve left many quarterly calls to see the stock decline regardless of solid results, as quarterly performance is often secondary to the perceived tone in predicting long-term performance.

Controlling the narrative becomes particularly problematic when operating in unfavorable market conditions. Do you strike an optimistic tone despite not knowing when the challenges will end, or do you temper expectations by acknowledging the adverse conditions?

The pandemic has painted a mixed picture for the insurance sector, and the financial results may only be telling half of the story. Although recent call sentiment – as measured by data provider FactSet – is primarily reflective of the economic rebound, our analysis looks at whether companies could better align their messaging with results.

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Brokers, as expected, are the best at conveying optimism: Brokers have consistently scored higher sentiment scores than insurers given their language usage, although the pandemic uncertainty and worries of a cashflow crisis emerging led to a material drop last year. As the economy reopened, the brokerage super-cycle accelerated the positivity on the calls. Recent calls have noted fears of wage inflation amid the “hiring war” among big brokers for talent consistently.

Personal lines players are on the defense: Personal lines carriers scored the lowest on sentiment in each of the last four quarters’ earnings calls. The sector has faced challenges ranging from increased severity due to inflation and supply-chain issues to normalized frequency as drivers return to the roads while the country emerges from the pandemic.

Worsening loss-cost trends have forced c-suites to temper already-cool expectations with predictions of elevated losses. This strategy prepares investors for the worst while hoping for the best. As a result, management may accept a short-term stock sell-off to protect management credibility and the firm’s long-term value.

Commercial lines carriers have had very strong results in recent quarters, benefiting from robust pricing and a rebounding economy. Stock performance has mostly tracked with companies’ results. So, their sentiment score fitting neatly into the center of the industry pack may seem a little puzzling. This score reflects talk of strong balance sheets, margin expansion and buyback plans, while commercial carriers also described supply-chain issues, rising operating costs and slowing prices.

After all, commercial carriers face the task of balancing their discussions to serve both as an optimistic showcase for potential investors and as a justification for hardship-induced price increases for their clients.

Similarly, reinsurers are addressing elevated catastrophe activity and the need for pricing. As we have previously discussed, reinsurers are reacting to more-frequent cats in different ways. Some firms are reducing cat exposure, while others are either diversifying their current books or relying on rate increases. As reinsurers push for pricing, management teams are perhaps using lower-sentiment language to increase the odds that the January 1 renewals produce hoped-for rates.

InsurTechs are maintaining positivity, irrespective of results. InsurTechs have to keep the positive dialogue up as they attempt to grow and improve their underwriting results, convincing investors to hold on for the bumpy ride.

Below we look at some key takeaways from the analysis.

Firstly, there is an incremental increase in brokers’ call sentiment despite slowing organic growth.

Amid the set of strong market conditions we have dubbed the brokerage super-cycle, it is no surprise that brokers have presented more positivity on their earnings calls over the last year than other insurance subsectors.

Aon and Willis Towers Watson tied for the highest score on the FactSet sentiment tracker over the past four quarters’ earnings calls, followed closely by Marsh McLennan and Brown & Brown. AJ Gallagher was the outlying pessimist among the brokers.

Willis had the most significant jump in sentiment of the brokers from the second quarter, as the company met its third-quarter targets that it set during the post-merger investor day. The firm has also been targeted by activist investors looking to improve operations and boost profits. Since announcing third-quarter earnings, Willis’ stock price is down 6.1%.

Although brokers have yet to admit organic growth may have peaked, the moderating commercial lines pricing and slowing economic recovery could make it hard for brokers to repeat the success of 2021 despite support from the inflationary pricing environment.

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Secondly, Chubb’s sentiment score is higher than other commercial carriers.

Large commercial carriers had more negative comments during their earnings calls overall, with the sector roughly in the middle of the pack as of the third quarter. Chubb was an outlier within the sector, with a positive sentiment score of 20 in its third-quarter earnings call.

While moderating rates and high natural-catastrophe frequency have challenged large commercial carriers, Chubb’s stock has risen 27.4% year to date, on positive margin improvement and stronger-than-expected EPS.

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Thirdly, although Progressive’s call sentiment remains negative, there was a material positivity jump in Q4.

With the company missing its long-term 96% combined ratio target over the past several months, Progressive’s stock performance has suffered this year (down 5.2% YTD but up 1.5% since October earnings), alongside the worsening loss cost trends.

Management has not shied away from discussing the company’s issues in earnings calls, and sentiment has trended low over the past year. However, we view the company’s self-critical view as the right approach to building trust long term, instead of allowing investors to be surprised by bad results or issues further down the road.

There was an improvement in Q3, but the higher call sentiment has not translated to stock performance, with investors waiting to see a material improvement in the company’s results.

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With Q3 sentiment scores exceeding pre-pandemic levels for many carriers, the coming quarters may be in for a change of tone as there are slowing rates in commercial lines.

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