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Inside in Full: Q1 earnings call sentiment: Holding our breath for what’s to come

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Topics: Financial Results InsurTech Rates

Our two previous quarterly FactSet sentiment notes began with a quick shout out to the New York Mets, and since they’ve been doing well so far this season, we thought it best to continue our new tradition...

The star pitcher Jacob DeGrom was injured just before the season began, and he hasn’t yet taken the mound in a game. He was expected to sit out in April and be back sometime in May.

While the team has played fine without him, fans have waited impatiently for news of his recovery and return. Unfortunately (for us), fans are on an information diet in the meantime, with no news too good or too bad.

In much the same way, insurance firms must carefully control the information and tone they present to shareholders (current and prospective) and employees during quarterly conference calls to prevent undue cynicism or alarm.

If company management reports an overly optimistic outlook, the firm might be crushed under high shareholder expectations that it cannot meet. Too negative, and shareholders may run, tanking stock prices.

Our analysis looks at how insurance firms projected tone during the first quarter’s conference calls using FactSet sentiment score data. Our findings include:

Industry-wide, sentiment has largely declined.

The median sentiment score of first-quarter earnings calls fell to -34.5 from -21.5 in Q4 2021. Industry-wide issues that were front-of-mind last quarter, including rising loss cost trends, social and financial inflation, and supply chain disruptions, not only persisted into the first quarter of 2022 but were joined by new issues, including the Russian invasion of Ukraine, rising energy prices, a troubled stock and bond market, and a recent yield curve inversion.

Brokers are the most optimistic but saw continued sentiment decline from last quarter.

Brokers have consistently held higher sentiment scores than insurers, given the sector’s different role within the industry. While higher, median broker sentiment scores have declined from a supercycle-high of 7 in Q1 2021 to -16 in Q1 2022 as the broker-friendly cycle winds down. Brokers spoke optimistically about margins, buybacks, and balance sheets but were negative on interest rate and supply chain issues.

Personal lines carriers remained the most pessimistic.

Personal lines carriers have scored the lowest on sentiment in every quarter since Q4 2020. Our Q1 preview noted that while supply chain constraints are still pushing loss cost trends higher for personal auto carriers, counterbalancing forces are also beginning to emerge.

Although there may be some light at the end of the tunnel for personal auto carriers, Q1 2022 results were still shaped by supply chain pressures. Carriers shared negative outlooks on operating costs and higher prices for car replacement parts.

Commercial lines carriers' sentiment fell, but the segment is now among the most optimistic.

While commercial lines carrier sentiment fell from -19 in Q4 2021 to -27 in Q1 2022, other segments, such as InsurTechs, fell even further, pushing commercial lines towards the top of the pack, with only brokers holding a higher median sentiment score. Carriers were optimistic regarding buybacks and margins but were negative on rising operating costs and supply chain constraints.

Reinsurer sentiment remained stable.

All insurance segments experienced declines in sentiment scores, but reinsurers’ median score remained flat, only falling from -32 in Q4 2021 to -32.5 in Q1 2022. While increasing catastrophe frequency and severity remain an issue for reinsurers, the first quarter of 2022 did not have any significant natural catastrophes, so sentiment remained stable. This quarter, reinsurers were negative on operating costs, interest payments, and falling net income but optimistic on margins and buybacks.

InsurTechs lost some optimism and now match specialty lines carriers near the bottom of the pack.

While insurers like Root, Lemonade, and Hippo rely on optimism and confidence in a high-growth future to keep investors happy, they have also been recently forced to recognize that not all is well in the state of InsurTechs. Firms have struggled to meet growth and underwriting goals and have been hit with increased short-seller pressure, with stock prices falling sharply.

Quarterly conference call sentiment scores have consequently fallen, pushing median InsurTech sentiment down to the middle of the pack.

  

 

Below we look at some standout takeaways from the analysis:

Aon’s sentiment score is the highest among brokers and all companies covered.

Despite brokers being the most optimistic sector on average, only Aon and Marsh McLennan’s sentiment scores are consistently above zero, with both firms having positive sentiment scores over the last five quarters.

With the slow decline of the brokerage supercycle underway, one would expect sentiment scores to drop off. Still, the firm exhibited optimism regarding its balance sheet, margins, and revenue, leaving it with a sentiment score of 30. Nevertheless, as the supercycle comes to a close, we may see lower sentiment scores from Aon and other brokers in future quarters.

  

 

WR Berkley saw a material optimism drop in Q1.

While E&S carriers are currently running better than broader commercial trends, and there are some reasons for optimism for the sector, WR Berkley’s sentiment score fell 40 pts from -22 in Q4 2021 to -62 in Q1 2022.

During the quarterly conference call, management commented on social, financial, and wage inflation during the quarterly conference call. Note that a negative sentiment should not always be associated with underwriting performance. Berkley has consistently reined in its optimism during cycle turns compared to commercial competitors.

  

 

We thought it would be interesting to see the direction of consensus earnings movement over the same period. Although the sentiment analysis was more pessimistic, the consensus estimate did show, on average, an uptick vs. Q4 2021. This difference could prove optimistic if overall social inflation and GDP trends worsen faster than expected.

  

 

 

 

Inside P&C provides unparalleled market intelligence on the entire US P&C market – from small commercial and personal lines right through to reinsurance and Bermuda. Redeem your complimentary 14-day trial for more premium content from Inside P&C.  

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