something to watch, page-25

Hi T23

Yes, you are correct - the JV portfolio is hard to value. Indeed, JV's like Claims Services Australia (CSA) appear to be vastly undervalued on the books of Calliden, particularly when you look at the dividend stream back from the JV to the parent (my own estimations on that indicate a carrying profit - undisclosed - in the vicinity of $2 million). But there are some JVs who aren't doing so well either - take Clubs for example - so summing the whole lot up becomes hard.

At the moment there is really only one way to value the stock, being (i) look at the COR and the net insurance result, then add (ii) the investment performance. This approach ignores JV profits which, in any case, won't be brought to book so therefore cannot be considered part of CIX's core income (for dividend purposes).

If you look at the COR it is probably running just a tad above 100 as we speak. That is before, of course, taking into effect any changes in cat cover costs. But for arguments sake, lets call it 100.

If the insurance business is breaking even (covering operating expenses and claims) then the profits need to come from the investments. My estimation - based on the duration and structure provided in the 2008 AASB7 disclosures - indicate that the shift in both the credit and yield curves will negatively impact the H1/09 result - probably to the tune of around 1.5%. Average portfolios during H1/09 (of leading investment managers) will yield around 2.5% (taking the -1.5% MTM effect into account); and using this figure I can see H1/09 profits falling when compared to H2/08.

I think if we were to "straight line" the 2008 result into 2009 you could expect a 2009 full year profit in the vicinity of $11 to $12 million. But based on the duration and credit shifts (particularly credit - note here that the actuarials on the insurance duration excludes credit [as it is "risk-free" pricing] hence what you lose on one side you actually do not always pick up on the other if there is a credit shift) is that a fair estimate of 2009 profits will be below or near the 2008 result.

I'm not sure what analysis the "big boys" have done on this, but they probably arrived at Jan-1-2009 thinking that the 11-12 million figure was a fair estimate - and based on this, probably conducted valuations based on an increasing franked dividend. I fear that when the H1 results are released in a month or so's time, they will revise this figure down (to at/below the 2008 result) and mark down their valuations accordingly.

An interesting question for someone to pose directly to Kirk is "who is your external investment manager" (mentioned briefly in the most recent presentation). If, as I suspect, it is actually one of their larger shareholders (either Hunter Hall or Australian Unity) then I think the conflict of interest question arises: and, more than likely, the investment style will be conservative, argumentative, and slow (hence the negative credit effect may actually be larger than the estimates I have provided - which are based on the "reasonable man" scenario.

I hope I am wrong, but I think 30 will be tested. CIX do not appear to have [yet] renewed their buyback - but I expect them to come in swinging with a new one if 30 is hit. At 30 this represents a 20% discount to Net Assets - a far too large discount, in the long run, for a company that has actually turned the corner.

Hope this makes sense.

Best regards
Kit