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Do CBL CORP FPO NZX shares contain hidden value?

Famed fund manager Peter Lynch once described investing as like playing 50 hands of never-ending poker at the same time.

Every so often you draw another card, and may have to make a new decision about the value of the ‘hand’ (the company) you hold.

I turned over a wildcard when I was looking at CBL Corporation (ASX: CBL) recently. Earlier this year, CBL purchased a dormant US insurer, Affirmative Direct Insurance Company.

Affirmative had no liabilities and no employees, just some capital and some insurance licenses. CBL expected Affirmative to start writing a small amount of business by the end of the year, but it did not sound as though there was much to pay attention to, from a shareholder perspective.

That was before Hurricane Harvey hit Houston, reportedly causing somewhere between $100 billion and $225 billion of damage. Although headquartered in New York, it turns out Affirmative Direct Insurance Company’s registered address is actually in Texas, not far from Houston, and the company is licensed to sell a variety of insurance services in Texas.

With a $200 billion clean-up bill, as well as the hit that existing insurers have taken, I’m thinking that CBL and Affirmative could have a significant opportunity to grow market share and write business in an area that will probably have significant demand for new insurance products over the next five years.

CBL doesn’t provide disaster insurance, but it sells a variety of construction-related insurance policies (among others) and it certainly looks as though there will be a lot of construction in Houston soon.

What is this opportunity really worth to CBL? Perhaps not much. Affirmative only has a couple of million dollars in capital, and can’t write volumes of business that will be meaningful to CBL in the near term.

Management has also stated that they will grow slowly in the USA, focusing on profitable business rather than growing headline revenues.

Still, I can’t help but think that at today’s prices, considering the existing business and the wild card potential of Affirmative over the next 10 years, CBL shares are a steal.

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Motley Fool contributor Sean O'Neill owns shares of CBL Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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