Comprehensive Retirement Income Products, page-29

Thanks very much for spelling that out. I hadn’t appreciated the full effect of lower yields.

@Just_a_guy

You’re welcome. The asset/liability duration mismatch, and the yield curve risk it generates, is a little technicality of the insurance/annuity business that isn’t really intuitive at first (I only know about it because I did come across it once, in my previous professional life).

I hate to think I’m one eyed, but I guess on the flip side of the coin is that in the event of a market melt up, and lower yields across the board, if I were a retiree and being offered 3% annuity vs 5% in highly priced equities which carry significant risk, I think i would opt for the safer option which may act as a further tailwind for cgf.

No, I think that’s a very good point. In any future market turmoil, I see “flight to quality” as remaining a definite feature, especially with the Australian superannuation system being so overallocated into equities (see slide 40 of yesterday’s presentation).

And, beside the strictly technical characteristics of their products, being a well-established player in the annuity business, like CGF is in Australia, will definitely contribute to the public's perception of “safety” in such an event.

One additional observation I would make is that, while benchmark (government bond) yields do tend to go lower in the event of flight to quality, credit spreads normally tend to widen; and that acts as a compensating factor from the perspective of annuity providers, who hold mostly corporate bonds (Investment Grade and High Yield) in their asset portfolios.

The past couple of years has been unusual, in that there has been a simultaneous compression in both benchmark yields and risk premiums; some have called it a “deflationary melt-up” in asset prices, which was most likely the legacy of a prolonged period of extremely accommodative monetary policy worldwide. Now that global policies are shifting towards a less monetary and more fiscal (inflationary) approach, I see this anomaly as being unlikely to persist.

Which is why I personally expect CGF’s Life COE margin to improve going forward, everything else being the same. Accordingly, I am welcoming this sell-off and taking it as an opportunity to build a more meaningful position in CGF (now one of my top-five holdings).

IMHO & DYOR, cheers.