The Investment Column: Insure for the future with Catlin Group as a long-term buy

M&C Saatchi; Genus
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The Independent Online

Our view: Buy

Share price: 424p (+4p)

The Lloyd's of London insurer Catlin Group floated on the market two years ago - just as the global insurance cycle was seemingly reaching its peak. In the three years that followed the 9/11 terrorist attack, premiums for property and casualty insurance - in which Catlin specialises - soared, while a relatively low level of natural disasters kept claims down.

However, it was at the end of this benign time for insurers when Catlin decided to list. This column was among a number of sceptics at the time to warn against buying into the underwriting industry at the top of the cycle.

Over the following months, premiums did indeed begin to fall. But in the autumn, the US and Caribbean was hit by one of the hardest hurricanes in many years, only to be hit even harder 12 months later in what turned out to be the most costly hurricane season in history.

This had a profound effect on premiums, pushing them back up in many areas at a time when they had been expected to fall. While rates in some markets, such as UK commercial property insurance, have continued to remain soft, insurers such as Catlin have been busy making the most of areas where premiums are now high.

The "lightning doesn't strike in the same place twice" theory is persuasive. However, climate experts have been warning that this year may see yet another harsh hurricane season. If it does, companies such as Catlin may have a hard time. But the industry is much more disciplined at buying itself adequate reinsurance these days, as was demonstrated by the small number of insolvencies after last year's beating.

Catlin is in good shape, has no exposure to the choppy equity markets at the moment, and with a current valuation of just 5.5 times next year's forecast earnings, it is also cheap. There may be some rough times in the short term, but this one is worth tucking away. Buy.

M&C Saatchi

Our view: Buy

Share price: 117.5p (+1p)

M&C Saatchi showed that its European expansion is gathering speed yesterday as the advertising agency unveiled plans to open a second office on the Continent, in Germany. M&C Saatchi also boasts that its Paris office, set up just last year, continues to go from strength to strength and had secured Bordeaux Wines as a new client. This comes hot on the heels of it winning the Pernod Ricard account in March.

The group, created by the ad industry legends Maurice and Charles Saatchi 11 years ago, is firmly focused on growing organically. When it goes into a new country sich as Germany, it will start from scratch and slowly build up the business by hiring local people.

Although it is tiny when compared to industry titans such as WPP and Havas, the company has plenty of big name clients including Dixons, Bradford & Bingley, GlaxoSmithKline and Somerfield. At its annual meeting yesterday, M&C Saatchi said it had added the likes of Pizza Hut, Direct Line Financial Services and AIG to this list.

These go some way to making up for the setback the agency suffered last year when it lost British Airways as a client. The airline accounted for 7 per cent of the agency's billings.

So far, the group's European expansion has been to budget, not that it is short of cash. At its March full year results, M&C Saatchi had cash in the bank of almost £20m. The company floated at 125p in the summer of 2004 but its shares have been lacklustre performers and now trade below this level, and at a discount to rivals. This presents investors with a good buying opportunity.


Our view: Hold

Share price: 455.25p (+10.25p)

Genus hit the headlines in 2004 with Picston Shottle, its four-year-old pure-bred Holstein bull. Such was the demand for his semen that the animal breeding group ran out of supplies. Two years on and the Shottle's powers seem to be fading. Yesterday, Genus said it had added three new high ranking bulls to the stud including one, named Bolton, which has eclipsed the Shottle and is now ranked number one by the industry. It's a cruel world.

The normal output of a bull is 120,000 doses of semen a year, although prize-winners like the Shottle and Bolton can produce up to 200,000.

Genus has around 400 bulls which produce semen for farmers in the EU, Australia, Canada, South Africa and the US. In December, the Basingstoke-based group decided to broaden its product base via the takeover of Sygen, a fellow animal breeding specialist.

Its interim results yesterday showed that the tie-up is working well as the combined company enjoyed a 79 per cent rise in pre-tax profits to £13.4m. We tipped the shares in November 2004 at 265p. Since then they have nearly doubled but at 15 times forward earnings they are worth holding on to.