Yes, a surge in the demand for annuities will likely require a capital injection, but the corresponding book growth will then entail a surge in profits. Therefore, shorting CGF on that basis doesn’t make sense.
On the other hand, a sharp decline in asset values not accompanied by a devaluation of annuity liabilities (as could be the case in the event of large-scale defaults in the bond portfolio) would force CGF to raise capital without a simultaneous increase in earnings.
But, if that is the rationale for shorting, there are much smarter ways of doing it. For instance, one could buy protection on a credit index using credit default swaps: by doing that, the shorters would at least know what it is exactly that they’re shorting (whereas the details of CGF’s bond portfolio aren’t public).
Or they could just buy out-of-the-money put options on an equity index.
Don’t you think?
CGF Price at posting:
$9.49 Sentiment: Buy Disclosure: Held
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