Subject: File # S7-26-18
From: Martin Carus, President
Affiliation: Martin Carus Consulting LLC

Feb. 11, 2019

Thank you for inviting commentary on what I believe is a very important topic.  I believe the recently outgoing comments of the CEO of Pepsico were extremely cogent.  I am writing this an individual investor and will avoid technical commentary.  In short, the material in 10-K and 10-Q filings is much too comprehensive to be of any use in making investment decisions in a timely manner.  For one thing, notwithstanding the narrowing of the time frame for making filings (i.e., from an arbitrary calendar quarter and year-end date to an arbitrary filing date) the information provided is always stale, but frequently to varying degrees.  In some cases (e.g., the period from December 31, 2008 to March 2, 2009) that staleness can be severely adverse to one’s analysis of the information “timely” filed.  In many cases, economic conditions can change rapidly.  Moreover, one cannot automatically assume that the direction and the degree of any such can be applied to any particular company being analyzed.  For instance, filers with a significant amount of market valued assets in their balance sheet would have shown a value in the financial statements that would have been much higher as of year-end 2008 than would be the case of the date of analysis in say, early March 2009.  However, what if the company sold its portfolio as of January 2, 2009 and did not incur the wrath of the ensuing market downturn during the first quarter of 2009?  This is like putting a statement user in the position of say a car buyer entering into a car dealership on March 2 and asking for the price of a particular car.  The dealer then says, I cannot tell you the price today but only as of December 31st, I’ll never be able to tell you the price as of today but I will be able to tell you the price as of March 31st but then only at May 15th!
In essence, the purpose of filings of this nature are to provide information that is useful for statement users (i.e., current investors, potential investors, potential lenders for various lending periods, suppliers, credit analysts, etc., as well as possibly regulars considering efforts to construct group capital requirements for consortiums that include regulated entities).  However, if such filings include information that presented in rather small type-face, fills 400 or more pages (as the large public company I was employed by did), how is an individual, or even an entity with significant technological capability, able to compare that information to other possible investments.  If one is considering investing in one industry member as opposed to the various other choices in that industry, or further, as between entities within more than a single industry, how is one able to deal with the overwhelming wealth of information provided, especially when much of the information is qualitative in nature as opposed to quantitative.  Subjective analysis, which really is what analysis is, becomes a virtually impossible task.  Consider trying to evaluate the investment propriety of 10 banks or insurance companies, each providing 400+ pages in their 10Ks.  Moreover, if one is making that consideration in early March, consider just exactly when the analytical process might end and how stale then conclusions might be at that point.  This is particularly prescient considering the Financial Stability Board (of which the SEC, as well as Treasury and the Fed) participate and which has decreed that there be less reliance by regulators on ratings from nationally recognized rating organizations (those “sanctioned” by the SEC)!  Having been a financial regulator for 34 years (the insurance industry), one of the “tricks” I encountered was not by companies submitting too little information but by the submission of too much information which results in numerous questions and explanations that seem to go on endlessly and extends the period for making sound, timely conclusions inexorably long.
As to the 10-Q specifically, for some industries (insurance in particular), the process of making certain calculations is long and arduous and on a quarterly basis hardly represents a full analysis of the matter at hand (e.g., the actuarial analysis of reserves) which quite frankly is not done on a quarterly basis.  Moreover, certain analyses are impacted by outside “noise” having impact but little to do with the operational performance of company management, a key element and goal of investors.  For instance, changes in interest rates can have a major impact on reserve calculations for life insurers and annuity writers as well as writers of certain classes of property/casualty insurance writers (e.g. workers’ compensation, medical malpractice, disability business and with the advent of new international accounting rules promulgated by the IASB, also non-US insurers—which one could be analyzing for possible investment).  It is noteworthy that in the first decade of this century, obviously not that long ago, there were approximately 70 changes in interest rates initiated by the Fed.  Suppose one was evaluating an excess medical malpractice insurer that had the same claims outstanding as of the beginning of such and at the end of such period but present valued those reserves in line with the change in the interest rates, both upwards and downwards occurring during that decade (albeit a simplified example for illustrative purposes only), the filed statements, both quarterly and annual, would show changes in performance, i.e., net income or net change to surplus all other things being equal, when in reality, nothing happened—there were no such changes at all!  Such filings would prove confusing and probably would cause investment decisions that turned out to be incorrect.  Why would you want that?  I don’t think you would.
The last point I would make is that the statements do not really align with the ability to make sound judgments of management performance inasmuch as they do not align completely with the life cycle of the business segments of the company.  Yes there is segmentation of business but not in terms of the life cycle of the product.  As an example here, I would step out of my insurance expertise and move to the automobile business.  The various stages of the product include:  conception, design, manufacture, sale and warranty period, the latter which could extend beyond what the car buyer ordinarily considers that period but which may pertain to the liability aspects of negligence of the producer (okay, I snuck in some insurance here).  The key as to assessing the success of management is more to germane to analyzing the various products life cycles as described then by aggregating the life cycles of several products into arbitrary calendar periods.   Suppose a current calendar year period is impacted by the events and decisions of a prior management or by a particular product conceived in a different time period.
Thank you,
Martin F. Carus
Martin Carus Consulting LLC