Analysts voice concerns over insurer’s 50% profit downgrade

Analysts voice concerns over insurer’s 50% profit downgrade

Analysts voice concerns over insurer’s 50% profit downgrade

Analysts yesterday raised concerns that Calliden Group has shifted its net profit target from $10m for the full year to between $5m and $7m.

Calliden, in its profit target update, said the downgrade was due to higher than expected insurer loss ratios, and below forecast growth of agency revenue.

“These risk factors, in combination, are the primary cause of the revision to the group’s net profit expectation,” the statement added.

Calliden also reported that it would release a further $3m to $4m in reserves for the builders warranty portfolio in the second half of 2013 as loss ratios had fallen below expectations. It stated while it would not change its expectation of $1m to $1.5m for the home portfolio in 2014, it is leaning towards the lower number due to the impact of reduced fees and commissions.

Analysts present on an investor call yesterday expressed their disappointment at the revised profit target. Fred Woollard, Samuel Terry Asset management, said: “Today’s announcement continues a long tradition at Calliden of […] enthusiasm at the AGM and at the half year results followed by  a reverse Christmas present for the shareholders towards the end of the year of: ‘Sorry chaps, it’s actually going to be another bad year’.

“This is not the first time this has happened and looking at the share price, you can see how the shareholder community has reacted. It begs the question: How confident should anybody be that Calliden can earn reasonable returns on its equity and at some point be able to use up its huge bank of banking credits in its present form?”

Another analyst, Carl Hanich of Flinders Asset Management, said: “For your profit to be 50% of what you said at the interim results is not a good look.”

Responding to concerns, Calliden CEO Nick Kirk told Insurance Business he understood the frustration with the profit target reduction – which he also shares as a shareholder himself.

“To balance that though I do look back,” he continued, “and see the transformation process we embarked upon in 2011 unfolding largely to plan, with our regulatory capital rebuilt, net tangible assets increasing each six month period, increasing profit performance each period and the reality of a large and fully functioning agency having been largely built.

“Profit consistency is very much part of why we are doing what we are doing, but we cannot instantly turn off the volatility that goes with being an insurer. Sticking to our plans though will mean successively reducing that volatility over time as we grow our agency business and continue to refine our pricing and risk appetite in the insurer.”

In the statement on the profit update Kirk also addressed the builders warranty portfolio:  “The reserve strengthening in the builders warranty portfolio highlights the underlying volatility of the insurance operations, which has been the primary driver of our business restructure over the past 18 months. “While we have de-risked just over 50% of the business by moving to a managing general agency model, we have some further work to do in relation to reducing this volatility.”

Looking to the future, Calliden is optimistic about the final dividend payout. The statement read that the long term growth of the agency operations is designed to reduce the overall volatility in reported profit for the group, and the reduced volatility, and a balance sheet that continues to strengthen (NTA currently $0.22 per share), providing Calliden with considerable flexibility when determining a final payout ratio for 2013.

Kirk added: “Our strategy remains on track to deliver improved returns to shareholders over time through the regular payment of fully franked dividends.”