CBL Corporation releases strong 1H14 results with a positive outlook

Key points

1.     CBL recently released its 1H14 results to 30 June 2014 with operating profit up 52% on 1H13

2.     CBL has largely achieved the financial performance it forecast when it issued its bonds in April

3.     The CBL 8.25% fixed rate bond with a maturity date of 17 April 2019 (callable at the company’s discretion at $103.00 on 17 April 2017 or $101.50 on 17 April 2018) has performed extremely well since it was issued just over four months ago. It is currently offered at an indicative price of $107.00 or a yield to maturity of 6.47% and is still considered good value at those levels

CBL Corporation Limited (CBL) recently released its 1H14 results to 30 June 2014. With the CBL 8.25% fixed rate bond being launched in April 2014, the results and company performance to 30 June 2014 were close to expectations as set out in the 7 April 2014 research report.

Key figures from the 1H14 results included:

• Revenue/Gross Written Premium for 1H14 was NZ$119m up 30% on 1H13 and 2% ahead of budget.
• Operating profit/EBIT was up 52% on 1H13 to NZ$20.4m but 6% behind budget due to a few new lines of insurance out of Europe being implemented slower than expected.
• NPAT was NZ$6.3m for 1H14 however this number was impacted by the non-cash unrealised foreign exchange loss (NZ$10.3m) on revaluation of the company’s assets that are predominately in €. This revaluation is required by accounting standards but importantly is unrealised (and non-cash) meaning that it will fluctuate with exchange rates on each reporting date. Removing the unrealised foreign exchange loss the NPAT would have been NZ$16.6m (not adjusting for tax implications).
• The main operating subsidiary, CBL Insurance Limited, performed strongly with excellent insurance ratios headlined by a combined ratio of 79.4% for 1H14 (from 86.0% in 2H13). The combined ratio is a measure of how profitable the insurance operations are before any investment income of premiums. 100% is breakeven and the lower the measure the more profitable the insurance operations. Most large insurers run in high 90%’s or even over 100% and rely on investment income from the large volume of premiums held to make a profit.
• The components of the combined ratio are detailed below with all areas seeing improvement, particularly the administration expense ratio which has seen the benefit of economies of scale as costs remain fairly static but on significantly larger volumes. The acquisition expense ratio relates to commissions or “ceding fees” paid by CBL to get the insurance business:  
  • Loss ratio                                    36.3% (FY13 37.9%)
  • Acquisition expense ratio           34.8% (FY13 35.5%)
  • Administration expense ratio        8.3% (FY13 12.6%)
  • Combined ratio                            79.4% (FY13 86.0%)
• Regulatory capital solvency margin improved substantially due to the reinvestment of funds from the CBL bond into capital of CBL Insurance Limited, lifting the ratio from 121.0% at 31 December 2013 to 139.8% as at 30 June 2014.
• AM Best rating agency affirmed CBL Insurance Limited’s credit rating in June 2014 at ‘B+’ positive outlook (equivalent to Standard and Poor’s financial strength rating of ‘A’).
• Total assets were up NZ$61.6m from 31 December 2013 to 30 June 2014 to NZ$339.8m
• Total liabilities were up NZ$57.1m over the same period to NZ$283.8m
• Total equity was up NZ$4.5m to NZ$56.0m
• The three balance sheet measures above reflect the AUD$55m bond issue in April (increasing debt but also the cash raised) and equity growing by the NPAT of NZ$6.3m less $1.4m in dividends paid and a small $0.4m reduction in other reserves.
• Gearing and interest cover ratios deteriorated (as expected) due to the bond issue. Debt to Equity was 1.2x at 30 June 2014 (up from 0.53x at 31 December 2013) and EBIT interest coverage was 13.8x (down from 21.6x over the same period). However, this only included 2.5 months of interest on the bond for the half year period and interest cover will fall further but from very high levels.
• Dividends paid for the half year were NZ$1.4m

Overall, the 1H14 results were strong and in line with expectations that were set in the April 2014 research report. The excellent combined ratio of 79.4% (and underlying loss, acquisition and administration ratios) underpin the core insurance operation of CBL Insurance Limited. The results also highlight the disciplined underwriting model of CBL which strives to write “business for profit and not volume”. This means it does not take on insurance business just for volume or take on higher risk insurance lines. The affirmation of the rating by AM Best in June 2014 also provides comfort.

The CBL 8.25% fixed rate bond with a maturity date of 17 April 2019 (callable at the company’s discretion at $103.00 on 17 April 2017 or $101.50 on 17 April 2018) has performed extremely well since it was issued just over four months ago. It is currently offered at an indicative price of $107.00 or a yield to maturity of 6.47% and is still considered good value at those levels.

All prices and yields are a guide only and subject to market availability. FIIG does not make a market in these securities. The CBL bonds mentioned in this article are available to wholesale investors only.

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