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It’s good to be small

It’s good to be small

In the next few weeks a small New Zealand based insurer – CBL Corp Limited – lists on ASX and NZX. CBL is a slightly odd beast in the insurance world: it focuses on small but profitable specialist niches, where it is able to earn significant underwriting profits. In contrast, mainstream insurers tend to write as much business as they can, even if it means taking on business that earns little to no underwriting profit. They do this because in the period between receiving an insurance premium and having to pay out claims, they can earn investment returns on the premiums written.

CBL’s focused approach limits the scale of the business, and requires it to look in unusual places to find opportunities. For example, a large part of its revenue is earned from insuring small to medium sized builders in France, where the regulatory regime has made this favourable. However, seeking out small but attractive niches like this has delivered good economics, and made CBL the sort of business we like to own.

Interestingly, it also promotes a favourable valuation dynamic, in the form of a liquidity discount. Because CBL is a small business, broking analysts explicitly apply a discount to their valuations to arrive at a price they feel appropriate for CBL shares.

This is a legitimate issue for fund managers like us, as our liquidity rules prevent us from owning large positions in small and illiquid stocks. However, for retail investors who do not need to move large amounts of money around, it is a free kick. For these investors, especially if they have a long-term view, the price they can buy at is lower than it otherwise would be, and the fact that the business is small really shouldn’t matter.

Of course there are no sure things in investing, and even an apparently sound company can go bad, so investors need to do their homework. However, to my way of thinking a free kick is a free kick.

Tim Kelley is Montgomery’s Head of Research and the Portfolio Manager of The Montgomery Fund. To invest with Montgomery domestically and globally, find out more.


Tim joined Montgomery in July 2012 and is a senior member of the investment team. Prior to this, Tim was an Executive Director in the corporate advisory division of Gresham Partners, where he worked for 17 years. Tim focuses on quant investing and market-neutral strategies.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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  1. Patrick Thomas

    CBL recently announced it exceeded IPO forecasts with revenue up 29% and NPAT up 83% on previous year. Share price has done well since listing, but the average daily trading volume is low. Still, it looked like someone picked up 3 million shares last week – hopefully Montgomery managed funds!

  2. Are there any similarities between this insurer and Markel Inc in the U.S.? Markel also insures in niche (and obscure) markets that are not covered by mainstream insurers. This will be an interesting one to follow.

    • I’m not too familiar with Markel, but on a superficial review there do seem to be similarities. I note however, that Markel has grown to be quite a large business.

  3. Nice post, and thanks for the idea. Of late I’ve been quite impressed with some NZ companies, they seem quite nimble.

  4. Sounds like an interesting business model, I’ll mark this one for further investigation.

    Speaking of niche financial services companies, I’d be interested to hear your thoughts on BLA if it’s small enough to count for your small-caps series… If you’re still doing that of course.

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