CBL says first-half earnings dropped 36pc due to increased reserves

Peter Harris, managing director of financial risk insurer CBL Corporation. Photo / Dean Purcell.

CBL Corp's shares fell about 12 per cent 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 per cent.

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

Internal operating profit was $22.5m in the six months to June 30, down from $35.1m in the same period a year earlier, and $17.5m below expectations, Auckland-based CBL said in a release to the NZX ahead of its first-half results on August 24. CBL has previously projected annual earnings of between $89.9m and $93m 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 $16.5m adjustment to CBL Insurance reserves represents a strengthening of 7.2 per cent of its total net claims reserves of $229m.

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 $205m in the first half, an increase of 29 per cent versus the same period a year earlier when revenue was $159m. "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.