Now capitalised at $86 million, Calliden returned 44.6% over the last 12 months and 33% a year over the last three years, but the legacy of its pre-turnaround past shows in the five-year total return figure, which lags appreciably behind, at 5% a year.
Insurer Calliden Group Limited (CIX) has almost completed a turnaround that has flown under the radar of many investors, but it is a good example of a niche player realising that it needed to change, and making the tough decisions to do it.
Calliden came out of the failed Reinsurance Australia Corporation (REAC) reinsurance business, commencing writing general risk products in March 2005. But it hit a downward cycle in the industry and unexpectedly high catastrophe claims – $400 million worth – in 2010 and 2011. Its capital base could not handle that, and profitability dwindled away to the extent that between FY05 and FY12, it could only eke out $2.9 million in total profit, including a hefty $10.2 million loss in 2011 (the company uses the calendar year for its financial year), amid one of the most difficult years the global insurance industry had seen in some time.
The management team realised that being the smallest listed insurer, and the 15th largest direct insurer in the country, with a volatile and unpredictable earnings profile, was not going to cut the mustard for investors.
In 2011, chief executive officer Nick Kirk and his management team signalled a change of direction, by which Calliden would transform itself from a dedicated general insurer to being more of an underwriting agency business: what it calls the ‘managing general agent’ model. It now writes policies on behalf of four external insurers, as well as itself: GLA (part of the Munich Re Group), Lloyd’s, SICorp and ACE Insurance. Third-party insurers now underwrite about half of Calliden’s overall gross written premium (GWP). The company also moved back into the reinsurance business.
Calliden returned to profitability in 2012, earning a net profit of $1.1 million, and resumed paying fully franked dividends, with a payout of 0.4 cents a share. But the powerful effect of the company’s rebuild was starkly apparent in 2013, with the new business consolidated and improvement across virtually every metric that an insurance investor likes to see.
Net profit came in at $6.2 million, compared to $1.1 million in 2012. EBITDA (earnings before interest, tax, depreciation and amortisation) rose by 81%, from $5.7 million to $10.5 million. Agency profit jumped from $1.1 million to $8.2 million. The insurance profit was down by 53% to $2.6 million, but even that was a very strong effort, given a $3.5 million blow-out in builders’ warranty claims, loss on discontinued portfolios of $700,000 and natural catastrophe claims of $3.3 million.
GWP through agency operations increased to $151 million, including $56 million underwritten by the company’s own insurer, while GWP underwritten by third party insurers surged from $52 million in 2012 to $95 million. Calliden is now one of Australia’s biggest agencies.
Better-than-expected investment returns of 5.3% generated investment income of $4.5 million for the group, which more than offset a poor result in underwriting. One of the few measures to deteriorate was the underwriting loss of $1.4 million, compared with a $200,000 profit in 2012.
The company said when it started the transition from that dedicated general insurer to a predominantly agency business based on the Managing General Agent model that improving shareholder returns through the payment of regular, fully franked dividends was a key driver of the change in strategy. Calliden’s previous underwriting business, with a highly unpredictable earnings profile, could not provide this cash engine, but the board said that the more consistent and reliable pattern of earnings growth from the agency business should enable a payout ratio of 60-80% of net profit.
The company certainly showered its shareholders with dividend bounty in 2013, with a fully franked interim dividend of 0.5 cents a share and a fully franked final ordinary dividend of 1.7 cents a share – representing an 80% dividend payout ratio – topped up by a special dividend of 0.5 cents a share, again fully franked. Calliden has a store of significant tax losses and franking credits: it will not be tax-payer for some time, but will be able to pay a stream of franked dividends to shareholders.
The capital position also improved markedly over 2013, with the group’s capital adequacy multiple (CAM) increasing from 1.9 times in 2012 to 2.3 times in 2013, and the insurance business’ CAM lifting from 2.2 times in 2012 to 2.8 times in 2013.
The bottom line is that Calliden now exhibits what should be a more predictable earnings stream – annuity-style – and dividend stream for shareholders. This does not appear to have been picked up by the market. Now capitalised at $86 million, Calliden returned 44.6% over the last 12 months and 33% a year over the last three years, but the legacy of its pre-turnaround past shows in the five-year total return figure, which lags appreciably behind, at 5% a year.
Releasing its result, Calliden told the market that it expected to improve its profitability in 2014 by at least 20%, forecasting a net profit after tax of $7.5 million–$9.5 million, depending on catastrophe and claims experience – the obvious caveat with any insurer. It said it would continue to pay a dividend of 60%–80% of net profit after tax.
The exposure to builders warranty insurance remains a worry, but the company did not foreshadow at its results announcement any increase in provisioning for this.
Analyst coverage implies a lift of 14.4% in earnings per share in 2014, and an increased dividend, to 2.4 cents a share, up from 2.2 cents (excluding the special dividend) in 2013. That puts the company on a prospective price/earnings (P/E) ratio of 12.3 times earnings, and a prospective fully franked dividend yield of 6.3%. With a share price at 38 cents sitting almost 12% below the analysts’ consensus target price, and the company saying its business transformation will be complete in mid-2014, those numbers imply some nice potential upside for Calliden.
