undervalued insurance stock, page-18

Actually - not necessarily. AASB139 revaluation marks assets on the balance sheet at current (end of year) value. The MTM 2008 "profits" have come from increases in value that have arisen from the duration extension during 2008 (per Kirk's comments - I think the second comment he made was actually incorrect). There are probably "credit" related losses included in that figure (which goes part way in explaining his slightly "misguided" comment - and these actually arise from a widening of credit spreads that has taken place since this time last year. In other words, you can make money on duration, and this can be partly eroded by credit spread losses. I think what Kirk was trying to say is that they have profited from their duration extension, and this will be partly offset by credit (spread) losses and partly eroded by the decline in insurance reserve valuations (as the NPV is lower when the yields fall, all other things being equal).

The conclusion, therefore, is that any investment result in 2008 has no correllation (at all) with 2009. What they would be best to do is shorten duration in Q1/2009, and perhaps re-think their equity exposure position (they need to rebalance their "unused" capital [read: "shareholders excess funds"] into equities to ensure that they track the return on these funds against the broader market (else the value of these excess funds is eroded if the market goes up).

Just on another subject: I see that the SP is now 40 cents (versus 30c when the buyback was announced). I would caution people thinking that the buyback is "at market" and "at any price": CIX's previous buyback [have a look at the history in 2006/2007] was only mildly successful in that very few shares were actually purchased. CIX only entered the market on one occassion, which indicates that the buyback order was at a set level, rather than an at-market price [easy to work out the level: check out the disclosures back in August 2006]. That level was at a discount to NPV at that time, and my guess is that they will adopt a similar strategy this time around. I personally don't think they will actually buyback any shares under around 35/36 cents (due to this discount factor), but at the very least that will put a floor under the stock for some time at that level.

On that basis it represents a pretty safe bet at even 40 cents: downside limited, and with possible upside if the net earnings figures for 2008 coming in on the high side (say, north of 6.5 million). Really depends on the actuarial valuations, which even CIX won't know until the start of 2009 (the short/longtail mix indicates to me that there is actually some room [positive] to move on those valuations, so the risk is actually to the upside).

Best regards
Kit