high turnover, page-7

Been watching Calliden for years now, but of late some key problems have surfaced. Selling CSA does not actually undermine their business model as it was a form of vertical integration when they purchased it and is unrelated to their insurance margin etc. It may, however, impact slightly negatively on their operating expense at a later date - but I actually think they got a decent price / multiple for it in any case. Their three key problems are (1) expense ratio is too high, and needs to be circa 90 for the business to make sense. Expensive office space in North Sydney certainly doesn't help the cause; (2) their quota share and reinsurance arrangements do not appear to have changed much since they became a GI back in 2005, and I suspect their are contractual reasons for this, which means that until they reach an economy of scale they are "stuck in the middle" (too small to have any negotiating power etc); and (3) since divesting in equities in 2008 - a sensible move at the time - they have maintained an overly conservative investment strategy. We all know that insurers are effectively cash flow funds managers, and if you think 6% return is good enough on your SHF and TIF they you are kidding yourself. Those structural issues aside, the board also has two key management issues that need to be addressed: Kirk needs to communicate more often (just because you have several key shareholders doesn't mean you can ignore the rest); and the Board needs to widen the share base so that the price is better supported at all other times. Being at the whims of Hunter Hall ain't going to cut it in the long term. CIX will either "plod on" or will be soon taken over and broken up in my opinion. NTA is somewhere around the 30 cent mark, even ignoring the value of each portfolio (which could be sold off as agencies). My guess is that the break up value of Calliden is mid 30's to 40c, subject to the market's perception of each niche's value. IMO probably worth a long term "close your eyes and buy" punt, hoping for this scenario to play out. Either way I think Kirk's days might be numbered at Calliden unless their fortunes change for the better very quickly... Best regards Kit