The moment of truth for insurers

THE INVESTMENT COLUMN

The UK composites are less than a month away from their reporting season and all the indications are that results for 1995 will beat what was already a bumper year in 1994. The current icy temperatures nothwithstanding, recent benevolent weather conditions and lower claims mean that profits will again be led by the domestic market for non-life business. But, as ever, share prices are already looking ahead to the downturn and the sector has only barely outpaced the rest of the market over the past year.

In the past, insurance companies have vied with banks as the Neanderthals of British industry. Typically, a downswing in the insurance cycle saw underwriting losses soar as rates tumbled, a situation which often combined with a decline in investment returns to put a double squeeze on the composites' profits. Only their spread of income, principally from life insurance, has helped to support profits during these lean times.

But with 1995 expected to mark a peak year of profitability, the optimists believe that the current cycle could be different from every other in recent experience. There are two main factors said to have had a profound effect.

Firstly, in the key UK market - which our table shows remains an area of critical importance to the big five insurers - the big losses of the early part of the decade are unlikely to be repeated. The argument runs that previous problems resulted from a rare combination of unusual subsidence claims after very dry weather and the mortgage indemnity crisis created by the housing market collapse of the late 1980s.

Apart from those circumstances being unlikely to be repeated, the insurance companies have moved to correct some poor rating practices. As anyone with a mortgage will know, buildings insurance rates are highly individualised, being based on the claims experience of particular streets, and much higher than in the past.

This new level of sophistication is the second reason the bulls believe insurers will have a better recession than in the past. Companies can react more quickly and precisely to factors affecting pricing.

The problem with these arguments is that, like generals, insurance companies tend to base their future strategy on the last war and have almost certainly failed to anticipate the next disaster. But for those brave enough to believe in the principle that past experience is no guide to the future, Nikko Europe is suggesting that General Accident looks attractive for the quality of its UK business, while Sun Alliance is a good defensive choice, bolstered by its greater ability to cut costs.

Atal weighs down Bullough

If Tevor Bond, Bullough's chief executive, has nightmares they are probably based in France and feature office furniture. The diversified engineering group's French office furniture division, Atal, has been a persistent headache and after three restructures in five years the jury is still out on whether the company can be put right.

Atal caused Bullough to issue a profits warning in September and wrecked the decent performance elsewhere in refrigeration, heating and engineering revealed yesterday. Group profits for the year to March were down 17 per cent to pounds 14.5m. Atal recorded an operating loss of pounds 4.5m, with a further pounds 2.2m of provisions to cover the latest round of re-structuring.

Atal's problems have been caused by low growth, a freeze on government spending and a rise in raw material prices. Production problems in the factories have added to the difficulties.

Bullough has wielded the big stick, but admits that if the company cannot be turned around it may have to be sold. It has brought in new management, cut jobs by 10 per cent and improved productivity. Steel prices are also starting to come down.

The problems of Atal overshadowed better performances in Bullough's mixed bag of other businesses. The UK office furniture division did well, boosted by the Pentos acquisition last year, which contributed pounds 1.6m in the eight months.

The refrigeration business also increased profits thanks to higher sales of chilled cabinets to supermarkets and fast-food restaurants last year. However, the hot summer dented profits at the heating division.

Further reshaping of Bullough is likely, with the addition of an engineering business to balance the portfolio top of the shopping list. But with gearing of 45 per cent the company does not have much room for manoeuvre. Atal losses have taken their toll on the shares, which hit 190p last year but fell a further 5p yesterday to 105p. With analysts cutting this year's profit forecasts from pounds 22m to around pounds 18.5m, the shares are on a forward rating of 10. Cheap, but not without risk.

Bookings sag

at Eurocamp

The woes of the holidays market were underlined yesterday by results from Eurocamp. The holiday group's bookings for this summer are down 20 per cent on last year as customers wait for a late booking and the chance of a discount. The group says it sold only 5-10 per cent of its holidays at cut prices last year, but some of those discounts were as high as a third.

It has also found margins squeezed as an increasing number of parents choose to avoid the higher prices during the school holidays. The company is considering "flattening" its pricing structure.

A further problem for Eurocamp is that three-quarters of its self-drive camping holidays are to France. Holidays there have been affected by the strong French franc, while there has also been a shift in sentiment caused by last year's strikes and the nuclear tests in the South Pacific.

This contributed to yesterday's 21p slide in Eurocamp's share price to 230p, barely above the 220p issue price when it came to the market in 1991.

Yesterday's slump was due principally to the bad news on bookings. The results themselves came as little surprise after the company had issued a profits warning in July.

Profits for the year to March were up from pounds 8.7m to pounds 9.3m on sales of pounds 87m. Superbreak, the short-break specialist acquired for pounds 21m last year, proved the star turn, contributing pounds 1.2m of profits on sales of pounds 10.7m. The acquisition underlines the wisdom of reducing reliance on the summer sales period. Stripping out Superbreak, Eurocamp's underlying profits fell from pounds 8.7m to pounds 8.1m.

Analysts have cut forecasts from pounds 12m to pounds 10.5m for the current year. With the shares at their lowest for two years, they are at a significant discount to the market on a forward rating of 11. But with the tour operator market clouded by so much uncertainty, the shares look a weak hold.