undervalued insurance stock, page-26

Hi Adok

From what I have read, the commercial/personal split is around 50/50. Yes, commercial rates have softened, however this could also be seen as a floor in commercial rates in light of the move away from foreign insurers (who had a large slice of this market until quite recently). I believe that commercial rates will move back again soon, and this will benefit some of the niche lines that CIX focuses on.

As for the top end of the personal lines area (eg. high value motor vehicles) these are less open to some of the cyclical claims swings than, say, lower value vehicles (where it could be said that there is a direct correlation, of sorts, between the unemployment rate and claims).

Not sure what the XOL ceilings are like on the cat cover, but moves last year - mentioned by Kirk in his 2007 end of year wrap - to rationalise the reinsurance programmes should probably bode well for CIX. I guess ultimately it comes down to wording as to how autonomous each "event" is, and whether there is also cover in place for a series of events (which I imagine there would be - given the high cost of reinsurance relative to CIX's GDP). Remember also that there is a quota share arrangement in place, so any downside from claims should be offset by quota share arrangements.

As for investment income: I am still scratching my head at Kirk's last comments. Yes, falling yields produce mark-to-market profits on a fixed income book (where duration has been lengthened), but in the most this only covers the change in the actuarial valuations (of claims estimates, particularly long-tail). That is, of course, unless CIX has also lengthened duration on shareholder's funds, where these MTM gains are not eroded by these valuations. In 2007 Kirk appeared to dodge some major bullets by reducing equity exposures (done again Q1/08) and appears to have moved his book away from "credit sensitive" fixed interest instruments (refer Q1/2007 summary, and then compare to Q1/2008 summary - the mix of debt securities has changed markedly during that period). For us, the shareholders, hope should be pinned, therefore, on the prospect that shareholder funds investments have (a) been lengthened appropriately in duration, and (b) have made MTM "yield" gains over and above any degredation caused by credit spread movement.

Regarding the dividend: Still reckon they will pay one. The recent move to reinstate a buyback indicates to me they want to put a floor under the share price (for whatever reason) and this floor will be further strengthened by paying a small, franked dividend at year end. I am sure Kirk himself would agree with the statement "you can't compare your PE ratio to the sector if you don't have any E"! My undertanding of CIX's capital structure is that the merging of the two general insurance entities (Calliden Limited and Calliden Insurance Limited) was not only an operational move, but was also designed to release prudential capital. I believe that sufficient capital has been released from CL to not only cover the increased CIL liabilities but to (i) buyback some existing equity, and in doing so improve the debt:equity ratio (which would make lenders happy), (ii) pay a small dividend, and (iii) put some cash aside for future acquisitions - whether they be book acquisitions or company/agent acquisitions.

One thing that can be said about Kirk (despite his "mixed" knowledge of investments") is that he is consistent. On that basis I will stick by my own prediction of a FF Div in the region of 1 cent/share.

Would love to hear others thoughts.

Best regards
Kit