Ann: Preliminary Final Report , page-3

Jamwolf.

Can you spot where they lost money?

There are several REAL weaknesses in what I can see:

(1) The COR has crept up. For a business operating on such a thin insurance margin (compare CIX to Suncorp and you will see what I mean) these guys are carrying far too much fat in their operating costs. If you are going to win business on price (which appears to be the case - can't really fathom the decreasing insurance margin in an environment of firming prices) you need to compete on cost. CIX, under Kirk's leadership, fails on this account.

(2) The investment revenue has fallen. Again, compare these results with the other insurers. CIX names "fixed interest securities" as their major investment grouping (no major change in allocation between 2008 and 2009) yet, unlike other insurers, CIX has gone backwards. Someone should ask the Q: what fixed interest investments? The only ones I know of which are going backwards are lower quartile funds under management. I seem to remember that CIX outsourced their investments: perhaps they really need to sack their investment manager (company) and get someone who can, at the very least, track the market. By my estimates these guys have p**sed around $4mm up against the wall on their investment income. Poor effort.

(3) Note the changes in the valuations and inputs (to income) from subsidiaries and minority interests: and then look at the cashflows to those subs and companies. Cash is being pumped into places like Mansions, which appears to be a bit of a black hole (note that we are not privvy to Mansions P&L so the concept of transparency goes out the window at that point). Looks like someone has been burning down a few high-end houses.

(4) Have a look at Note 25 in the accounts. Loan from bank commenced 27/7/2007, for a three year term (there is also reference elsewhere in the text to it being repayable in July 2010). If you consider "unrated" bank margins, my guess is that the cost of debt will increase by around 2% from July 2010 onwards if CIX does not repay (this detracts from the 2010 result by around $250k, and $500k for years thereafter). Importantly, whilst CIX says that there is sufficient cash and liquid assets to repay this debt, most of the "liquidity" appears to be in these [underperforming] fixed interest securities. They won't liquidate "unlisted trusts" (I bet you they are not exactly liquid in the current environment); so it needs to be repaid from fixed interest; and as a result they will end up holding a disproportionate amount of non-FI investments (which will in itself require a reconfiguration of their portfolio). In essence, whilst they have the capacity to make the repayment, by doing so will create a bit of an investment mess for them in 2010. Don't look to investments to improve the 2010 result.

(5) Dividend! Last time I read the Corps Act (just happened to be reading Section 254T last night - good read; would recommend it!); "Dividends may only be paid out of current year profits". DOH! It appears as though Kirk and the lads need to have a read....

All that said, bad news is out, and - as usual - Kirk is bullish (very much a "last chance to buy before it goes lower" type of guy, from what I can make out); so I guess that counts for something. Probably worth a punt around these 27/28 levels - I don't think its going to go much lower in the short term. As for 35 cents - That would imply a 25% increase in market cap, and given that NTA is 21 cents (admitedly, intangibles are solid, with valuations well founded) I somehow don't think CIX is really well placed for that sort of gain, particularly when you have other insurers out there who have firming rates and improving investment results in what is actually quite an easy market.

Will leave it up to the market to decide. Would be good if someone could cross examine Kirk on some of the above at tomorrow's broadcast.

Best regards
Kit