shot duck, page-3

Jamwolf

NTA or NAV? Yes, you are correct I guess - if you "liquidated" all investments you would end up with an NTA of around 26 cents, and when you add on intangibles your NAV is even higher...

BUT...

You are assuming that the insurance book has a positive value. Remember also that the core book (including the Unity book) is tied up with a quota share, but it appears as though new/acquired business may not be. Calliden has flagged a rather large loss in the last annoucement, and the thing that worries me is that one loss can be in the region of 10% of their capital. Makes me wonder where the hell APRA was given that a large exposure of this kind should require approval before writing the contract...

The other thing that worries me at the moment is the Combined Ratio (we won't know what it was for the 2009 year until their reports are released). CIX has persistently operated above 100, which means, in essence, their insurance business, when taking into account operating expenses, is actually unprofitable. Profits are therefore derived solely from investment income - and against their peers they have gone from being on top (outperforming on investments) two years ago, to being a distant last in the prior year (and half yearly results).

Essentially, if the insurance business is unprofitable, you want to be sure that the investment business is; yet they have proven over the past 2 years that they are actually pretty ordinary at that as well.

The only out - the way I see it - is to value CIX "at sale" - what would they get if they flogged the entire portfolio. These are not the wonderful good old days where Wesfarmers paid 16x for OAMPS, instead I think a ratio of 10x would be more approriate. Based purely on the investment result, CIX would be lucky to sell the GWP of 300 million for 30 million, given that they are probably only [relistically] running at an insurance profit margin of 1% (remember that it is also being "propped" by the quota share; so even 1% may be a generous margin). [300mm x 1% x 10 = 30mm].

Add the 30mm to the net capital, and you have CIX valued in the vicinity of 110mm (less a bit more now I think). At sale, therefore, CIX is actually only worth around 40 cents per share (give or take a bit); and that is assuming a buyer can be found (CIX has a mixed portfolio so I doubt one SINGLE buyer would buy it) and the sale costs are not depletive (which would be taken into account by the buyer).

The problem, as I see it, is (a) poor underwriting, (b) overly conservative reinsurance - when times are good they have not benefited, (c) poor investment result, and (d) high cost base (high COR). Doesn't exactly inspire confidence.

So gettiing back to the question about 26 cents. Yes, 26 cents is good in terms of net tangibles, however if Kirk continues to allow Calliden to flounder those values will continue to decline, and the value of shareholder wealth will decline with it (i.e. SP). In my mind they need to actually DO something, not take this passive "we will look for opportunities" stance; which will destine this stock to the scrapheap. The responsibility lies with the board (who have set these conservative risk parameters), however when you dig deeper into the board constituents it is hardly surprising that an underwriter, salesman, accountant, and equity manager can't really push this company forward.

I used to be a fan, but no longer. Enough spin Kirk.

Regards
Kit