Why the Cover-More Group Ltd share price was crushed today

Credit: Vanessa Chettleburgh

Shares of Cover-More Group Ltd (ASX: CVO) were absolutely hammered today after the business provided a trading update. The shares fell as much as 31.8% to a low of $1.405, although they are trading 12.5% lower at $1.80 at the time of writing.

What happened?

Cover-More Group is a travel insurance business, while it also operates in medical assistance markets with its primary interests in the Australian market.

The company begun by saying that group sales had risen 6.6% compared to the prior corresponding period, with 7.1% growth in Australian gross travel insurance sales and 27.6% gross sales growth across Asia.

While sales may have increased, expenses also rose at an even greater pace. The company warned that its earnings before interest, tax, depreciation and amortisation (EBITDA) were just $20.4 million, down 16.4% from last year’s $24.4 million result. Some one-off costs did impact the result, but excluding those items EBITDA was still 9.8% lower at $22 million.

It blamed the poor earnings result on higher claims costs, which accounted for $5.6 million of the damage inflicted on Cover-More’s result, driven by the weaker Australian dollar and the continuing impact of the portfolio mix shift. The ash cloud in Bali which impacted flights last year also impacted the result, as did a number of lost contracts in its Assistance business totalling $600,000.

Notably, the company said it was entering the second-half of financial year 2016 (FY16) with “strong momentum”, while it was also in negotiations with its underwriting partner in an effort to limit the volatility experienced through the business.

What happens next?

Today’s release was simply a trading update, whereas a full rundown of the group’s first-half performance will be made available to investors on Friday, 19 February. For now, however, the company said that its business model “remains resilient” and that it will continue to reprice its products to recover margins and optimise returns.

This could work, but higher prices could also force customers to consider other, cheaper, alternatives. Still, it is encouraging that sales grew during the period in both Australia and Asia, but the company will need to find a reasonable balance to both retain customers and reward shareholders.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below.

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