Originally posted by Transversal
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?
Interesting idea around CGF's bond portfolio. How much would be made up of investment grade corporate bonds?
Below is CGF vs the LQD Investment Grade Corporate Bonds ETF (US) over the last 2 years. Bonds seemed to be sold off (purple line)
Looks like some correlation.
(20min delay)