Question about insurance company accounts - prior year claims expenses

[Fowci]

I'm looking at a very interesting insurer.

 

The insurer is small, has exceptional underwriting profitability, and is growing very quickly. It's priced at approx 10x earnings.

 

However, one particular issue is that it continually reports positive prior year claims expenses. So its 2013 income statement looks like this:

 

http://s28.postimg.org/81foejwjt/image.jpg

 

That looks pretty damn good. But in the notes, you see this:

 

http://s28.postimg.org/7amy8ru6h/notes.jpg

 

So the notes are saying that of the total net claims expense (after subtracting reinsurance reimbursements), 7.6m of 45.8m are reassessments of previous years. That's a full 17% of the total claims expense.

 

This might not be particularly worrying except that the company is growing very quickly, as in GWP growth of like 30% a year. It would seem that if they habitually underexpense claims, this will distort underlying profitability. But when they stop growing, the bowwave of underexpensed claims will catch up and reduce profitability.

 

Does that make sense? Anyone got any thoughts?

 

By the way, the company is IPOing at the moment, and is called CBL insurance. I'm still very interested in the company. Management are keeping most of their shares, and there's still growth runway (they're only $300m market cap).

 

[Green King]

what kind of risk do they deal with ? Where is the balance sheet?  looks like a growth trap. Things like these could grow for years until one day it blows up.

[Fowci]

what kind of risk do they deal with ? Where is the balance sheet?  looks like a growth trap. Things like these could grow for years until on day it blows up.

 

http://www.cblinsurance.com/investor-centre/financials/

 

Lots of financials there. Here's a pic of the 2013 balance sheet:

http://s15.postimg.org/tpmjo9whn/image.jpg

upload

 

And from the IPO offer document so you can see the growth:

http://s21.postimg.org/mnijlaavb/growth.jpg

free photo hosting

 

It will be listed on the New Zealand and Australian stock exchange.

 

They operate in niche areas, like French builder's liability insurance.

 

[Green King]

I have nothing add. If you think they are using growth to cover up loss than pass on it. Its a trap. ;D

[Fowci]

I have nothing add. If you think they are using growth to cover up loss than pass on it. Its a trap. ;D

 

Thanks. It's a matter of degree - they're still profitable when adjusting for this, just not as profitable. I'll wait to see if the price comes down once listing is complete (in a few weeks).