The Investment Column: Stormy weather forecast for Amlin

Ransom gets health kick from its latest purchase - Crest Nicholson set to ride housing slowdown
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The Independent Online

Eight months ago, when this column last looked at Amlin, we highlighted how the past few years had been short on natural disasters, meaning fewer payouts and more money kept in the coffers of insurance underwriters. Amlin is one of the biggest, operating mainly through the Lloyd's of London insurance market.

Eight months ago, when this column last looked at Amlin, we highlighted how the past few years had been short on natural disasters, meaning fewer payouts and more money kept in the coffers of insurance underwriters. Amlin is one of the biggest, operating mainly through the Lloyd's of London insurance market.

Since then, we have had the worst hurricane season on record, in August and September, and insurers have been stung for more than $22bn (£13bn) in storm damage claims. Amlin has been one of the worst hit in the UK, to the tune of $113m.

The day our note on Amlin appeared was also the day that terrorists killed 191 people in Madrid, highlighting in the most horrible way why people and businesses take out insurance. Terror helped propel insurance premiums to the very high levels of the past few years. And while many thought insurance rates had reached a peak by the spring of this year, the savage hurricane season ensures that premiums maintain their high levels next year.

In spite of this, Amlin's shares have continued to drift. We advised investors to take profits in March and the stock has fallen by more than 10 per cent. As we expected, the market has been unwilling to overlook the fact that, even if rates reach a plateau, the inevitable fall is just around the corner.

The share price fall has taken some of the froth out of the shares, while the hurricane season has staved off the collapse in premiums. Those who didn't sell in March can probably squeeze a few more dividends out of this before they need to consider selling. With an incredibly strong combined ratio of 73 per cent (anything under 100 means the company is making a profit), a sensible management team, and one of the best dividend yields in the sector, there is much to commend Amlin. But the shares are not going to soar at this point in the premium rate cycle. New investors should stay away.

Ransom gets health kick from its latest purchase

William Ransom, the UK's oldest pharmaceutical company, which specialises in botanical ingredients, is starting to feel the benefits from its own natural remedy.

It said yesterday the recent purchase of Health Perception, the business started by the former Olympic swimmer David Wilkie, had helped boost six-month profits by 155 per cent to £800,000. This was its fifth acquisition in three years, and has provided Ransom with a dominant market position in glucosamine products. Derived from fish, they are used to treat arthritis and of Ransom's £4.2m growth in sales, £3.4m was from Health Perception.

Ransom has been buying up consumer brands, from which it develops botanical versions. It has already produced a vegetarian alternative to glucosamine, a sign of how it uses its expertise to expand its product range. This already includes nappy rash ointments, elderflower extract and muscle rubs.

Management believes sales could grow fivefold by 2008 to £50m. Looking to 2005/06, the shares become reasonably valued at about 13 times earnings, but they are not for the faint-hearted.

Crest Nicholson set to ride housing slowdown

Any investor who bought into the housebuilding market four years ago will be feeling rather clever now, and anyone who bought Crest Nicholson will be even more smug. Since January 2000 it has outperformed the index by 221 per cent, 19 per cent better than its peers. But will a rising interest rate environment and an end to house price inflation scupper this outperformance?

There is concern about a sharp slowdown in the housing market, but with a dramatic and rapid rise in interest rates still unlikely, the fundamentals of the industry remain strong. Mortgages represent about 35 per cent of net income, which is still a long way off historical highs, and unemployment remains low. Barring drastic economic slowdown, there seemfew reasons for pessimism. There is also an acknowledged shortage of housing, and government targets for new builds will keep housebuilders busy.

Crest Nicholson has moved towards social housing which, although cheaper on a per unit basis, brings in cash payments from housing associations during the build. This reduces the risk of lower market prices upon completion, cuts marketing costs and gives it a positive cash flow throughout the build.

Innovation in housebuilding is rare, but Crest, in committing to owner-occupiers and council tenants, deserves recognition.

Crest has a multi-year land bank, which it is seeking to grow. With a strong balance sheet, strong cash flow, some protection from a falling housing market and rising interest rates, it remains an excellent pick in a sector with strong fundamentals. Keep buying.

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