The Insurance Windfall Mystery: Part 2
Quote:
Originally Posted by
Snoopy
4/ I leave the most significant part of my 'profit normalisation' until last. Have a look at AR2019, note 34c, part of the insurance activities notes.
|
FY2019 |
FY2018 |
Change in Discount rate |
($0.207m) |
($0.120m) |
Difference between actual and assumed experience |
$5.745m |
$2.491m |
Life Investments Contracts: Difference between actual and assumed experience |
$0.266m |
$0.294m |
Total |
$5.804m |
$2.664m |
Now go to note 7, p55 in AR2019 and you will see that the $2.664m figure is reported as a 'Fair value gain on Contingent Consideration' for FY2018. Yet the equivalent figure for for FY2019 is missing, no doubt subsumed in the new expanded for this year Insurance divisions wider profits. I consider that $5.804m not repeatable and a figure that should be removed from operational profits, just like in FY2018. I don't know why Turners seem to have changed their policy on this but I am calling them out. Take out that $5.804m gain from the Turners Insurance arm operating profit (declared $8.227m for FY2019) and you will find how profitable the underlying insurance division really was in FY2019.
The following table (from the respective Annual Reports 'Insurance Related Disclosures: Section C 'Surplus after taxation from insurance activities arose from') shows why profits from Turners insurance division, in the past, could largely be ignored in the overall profit picture. Yet over the last couple of years we certainly can't say the same. This is why I see 'insurance' as such an important piece of the profit puzzle to consider going forwards.
|
FY2019 |
FY2018 |
FY2017 |
FY2016 |
FY2015 |
Insurance Contracts: Change in Discount rate |
($0.207m) |
($0.120m) |
$0.164m |
($0.119m) |
($0.311m) |
Insurance Contracts: Difference between actual and assumed experience |
$5.745m |
$2.491m |
($0.552m) |
$0.062m |
$0.138m |
Life Investments Contracts: Difference between actual and assumed experience |
$0.266m |
$0.294m |
$0.420m |
$0.599m |
$0.696m |
Total Insurance Profit Contribution (after tax) {A} |
$5.804m |
$2.664m |
$0.032m |
$0.542m |
$0.523m |
Declared Turners NPAT {B} |
$22.329m |
$23.192m |
$17.609m |
$15.573m |
$18.069m |
Insurance Adjustment/NPAT {A}/{B} |
26.0% |
11.5% |
0.18% |
3.48% |
2.89% |
Insurance Return on Assets (NPAT) above Contract Liailiities |
$1.022m |
$0.823m |
$0.383m |
$0.307m |
$0.243m |
There is a reason for this. On 31st March 2017 the 'Autosure' vehicle insurance business was acquired. That means that FY2018 and FY2019 include results from 'Autosure', whereas previous years did not.
I previously wrote:
"I consider that $5.804m (for FY2019) not repeatable and a figure that should be removed from operational profits,"
But I am not sure that my opinion on that score is right.
Particularly interesting, I thought, was that Turners separated out 'Investment returns on assets in excess of insurance contract and investment contract liabilities' (AR2019 p86). I read this to be the insurance profit that can be pocketed by Turners shareholders. Fair enough and this was just over a million dollars, $1.022m, for FY2019 out of a grand total of NPAT attributable to insurance activities of $6.990m: nice.
However, if you then move forwards to 'note I' the 'Disaggregated information' (AR2019 p90), you will see the insurance profit of $6.990m split up into 'Statutory' profit of $2.834m and 'Shareholder' profit of $4.156m. This seems to contradict the information presented in section C. Is the profit we shareholders can book $1.022m or $4.156m? I don't know the answer. But it gets worse.
If you look at the 'Operating Segments' part of the Annual Report (p53, AR2019), you will see total operating profit for insurance is $8.227m. This doesn't quite tie in with the information under the 'Insurance Related Disclosures: Disaggregated Information' section of AR2019' where profit before tax is quoted to be $8.577m (The explanation for the $0.350m difference may be found on p91 of AR2019: The $350k represented a revaluation of an investment property that had already been disclosed under 'Property Plant & Equipment). Of the declared insurance earnings of $8.577m (AR2019 page 90), only $5.099m of 'shareholder earnings' -before tax- occurred over FY2019. So how is it that Turners can claim a larger $8.227m worth of insurance earnings over FY2019 in the 'Operating Segment' earnings on page 53?
The only answer I can come up with is that Turners are claiming profits that actually belong to the likes of life policy holders as their own. I hope someone can tell me that I am reading these figures the wrong way. Because if I am right, then these 'insurance profits' claimed by Turners look very dubious.
SNOOPY
Bank Covenants FY2016- FY2019
I have tabulated below these important debt statistics over the last four years.
Leverage Ratio |
|
Averaged Gross Bank Debt (Estimate) |
EBITDA |
Gross Bank Debt/EBITDA |
Maximum Standard |
FY2019 |
1/2 x (($251.177m - $163m) + ($230.459m - $133m)) |
$49.786m |
1.86 |
2.00 |
FY2018 |
1/2 x (($230.459m - $133m) + ($191.708m - $69m)) |
$51.304m |
2.15 |
2.00 |
FY2017 |
1/2 x (($191.708m - $69m) + ($109.327m - $0m)) |
$38.844m |
2.99 |
2.00 |
FY2016 |
1/2 x (($109.327m - $0m) + ($95.151m - $0m) ) |
$35.131m |
2.91 |
2.50 |
In each year I have subtracted the 'securitized debt' from the 'gross bank debt'.
The above table indicates a 'triple fail', up until FY2019. However there are difficulties for investors in determining what the average gross bank debt is over the year. My 'arithmetic average' using the year start and end figures will overestimate the average debt if more of the incremental debt is acquired over the second half of the year, for example. So in this instance, the trend is of perhaps more interest that the absolute value.
The indicative securitised debt for FY2018 and FY2017 may be found on p15 of AR2018. I am assuming these are representative over the year figures. That is because they do not match up with the end of year securitized debt figures on p57 AR2018.
Unfortunately these indicative securitised debt figures have been dropped from the FY2019 report. However I did note that over FY2019, the end of year securitised loan balance increased from $145m to $175m. I have used this $30m increment to get the indicative securitised debt over FY2019 of:
$133m + $30m = $163m.
I have used this $163m estimate figure in the table above.
Interest Ratio |
|
EBITDA |
Total Net Interest |
EBITDA/Total Net Interest |
Minimum Standard |
FY2019 |
$49.786m |
($14.952m-$1.791m) |
3.8 |
3.5 |
FY2018 |
$51.304m |
($14.344m-$1.343m) |
3.9 |
3.5 |
FY2017 |
$38.844m |
($11.350m - $0.206m) |
3.5 |
3.5 |
FY2016 |
$35.131m |
($11.436m - $0.353m) |
3.2 |
3.5 |
It does seem that the financial position of Turners over the last few years is becoming stronger, not weaker as some may think. However these are all minimum standards. Whether these statistics are strong enough for investors putting their money into Turners today is a matter for each individual investor to decide.
SNOOPY