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Update: CBL shares fall 12% as reserves increase dents profit

Friday 18th August 2017

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(Updates to add market reaction, comment from analyst) 

CBL Corp's shares fell about 12 percent after the financial risk insurer said first-half profit dropped by more than a third, largely on a $16.5 million increase in reserves to cover future claims. Revenue grew 29 percent.

Auckland-based CBL's shares fell to $3.32 after the company said first-half operating earnings fell 36 percent, largely due to a $16.5 million increase in CBL Insurance's reserves to cover future claims, although revenue growth was still strong. 

Internal operating profit was $22.5 million in the six months to June 30, down from $35.1 million in the same period a year earlier, and $17.5 million below expectations, Auckland-based CBL said in a release to the NZX ahead of its first-half results on Aug. 24. CBL has previously projected annual earnings of between $89.9 million and $93 million for calendar 2017. 

"The decision by the board to strengthen reserves in certain lines is seen as a prudential and appropriate approach and takes into account advice from CBL’s external actuarial consultants," said CBL chief executive Peter Harris. He emphasized that the move wasn't a restatement of existing reported and open claims but rather "is an adjustment that CBL's independent actuaries consider is prudent to make to our future claim forecasts."

Harris said the $16.5 million adjustment to CBL Insurance reserves represents a strengthening of 7.2 percent of its total net claims reserves of $229 million. 

Forsyth Barr senior analyst equities James Bascand said the market reaction was not "totally unfounded."  He said Forsyth Bar suspects a portion of the increase in reserves is due to claims frequency on one of their products deteriorating a little, although margins remain strong.  Another portion may be due to the continued low-interest rate environment in Europe which is likely seeing the discount rate applied to reserves lowered, he said.  

"The reserving brings into question uncertainty about whether there is further risk to claims deteriorating, we have very little transparency on the market/product," he said.

While the growth is positive "it could be at lower margins under that assumption. This is likely the challenge the market is grappling with," he said.

CBL said gross revenue was $205 million in the first half, an increase of 29 percent versus the same period a year earlier when revenue was $159 million. “Much of the benefit of that substantial lift in revenue will flow through into earnings numbers over the next 12-to-18 months,” said Harris. 


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