Shell Game

Some time ago at a CEO forum, a broker asked insurance company executives to provide the best standard of financial health in these tough economic times.

The confusion motivating the question is well-placed: one minute an insurer publicly reports having excellent quarterly underwriting earnings; the next day we learn it is bankrupt, awash in a sea of red ink.

It is a sad comment on the state of transparency today that if a consumer wants a true measure of the honest state of a company’s health these days, he or she will not likely find it in a company’s public quarterly statement.

Some companies do make a genuine effort to have their quarterly financial statements understood, it is true. Alas such renegade clarity is manifest only in contrast to the general befuddlement that accompanies the financial disclosures of most of their peers.

Let’s call a spade a spade: as it stands, the public financial statements of too many companies today are completely written in code, borderline disingenuous and do nothing to contribute to public comprehension.

This is an area that requires immediate attention. If regulators were serious about transparency, they would find some way to de-mystify and clean up the jargon regularly appearing in companies’ public financial disclosures.

Right now, it’s too easy for companies to hide behind insignificant or irrelevant financial measures, or play a shell game with disclosed facts.

Let me exaggerate (sort of) to prove a point. Is your net income down by almost Cdn$1 billion in the third quarter? No problem, lead with your net revenues. Are your combined ratios lousy? No problem, bury them or leave them out of your press release altogether; instead, you can quote your CEO gloating about the company’s 25% increase in net premiums written.

The net effect of doing this on a grand scale is to create public cynicism about the honesty of public financial disclosure generally.

How does the industry help to reverse this cynicism? Ideally, all companies in the industry — not just federally regulated institutions — should be required to publicly disclose financial data in a standardized, plain-language format.

All of the relevant measures of an insurance company’s financial health should be included on the standard form — net income (i. e. profit), combined ratios, net premiums written, loss ratios in the various lines of business, return on equity (ROE), investment income, quarterly claims costs, MCT scores, etc. etc.

Standardization is key. Companies’ quarterly disclosures should all be in the same format so that the financial results can be compared from company to company.

Income should not be expressed by placeholders (i. e. it’s “Cdn$200 billion,” not “Cdn$200,000,000 x 1,000”)

Quarterly results should not be reported on the same form as nine-month or full-year results, thus ensuring clarity around the financial periods that companies are talking about.

Most importantly, clear definitions should be a required feature of the form. Joe Schmo on the street does not know, for example, what the company is talking about when it says “organic pre-tax growth” hit record levels. Similarly, he won’t know why a company led in a press release with its “net operating revenues” instead of “net not-technical results,” “net change in reserves for unearned premiums” or “gross premiums written.” In one company disclosure, the difference between “net operating income” and “net income” was almost Cdn$50 million. Does anyone out there, besides accountants, know the difference between these two different forms of income?

Cleaning up financial disclosure statements will not be a quick fix. It may even require the involvement of the regulators. But if it gets done, public reporting on the financial statements will be greatly improved, as will the public’s understanding of what the numbers actually say and mean. And that will reflect well on the insurance industry as a whole.