Qualiport

By Bruce Jackson (TMF Googly)

Kilburn, London -- If you are a shareholder in Independent Insurance (IIG), as the Qualiport is, the chances are that you're feeling quite pleased with yourself. In the space of just over a week, the shares have rocketed over 40%. That's the sort of return normally associated with an Internet share. They do have a corporate website (external link), so perhaps that's why the share price is on fire.

Then again... maybe not. One can be excused for dreaming, can't one? I somehow don't think the Independent Insurance share price will soar another 40% next week. However, one broker has apparently put a price target of 350p on the shares, up from a previous target of 290p. I always take these recommendations with a pinch of salt -- we don't know why, how, what assumptions or, more importantly, over what time period the broker is talking about. Nevertheless, we won't be complaining if the shares hit 350p in a year's time, because that will be a handy 14% appreciation from today's closing mid price of 307.5p.

Note that in the numbers below, we use the bid price, hence they are lower than the mid prices as per our quotes service. While we're on this, we should also remind readers that this is a real money portfolio, and that broker's commission and stamp duty are also included in the numbers at the bottom of this page. I don't know of any magazines or tip sheets that use this same criteria, not that we are trying to compete with them -- and not that we are a tipping service.

In the 16 months since the Qualiport was launched, we've spent a total of £331.52 on trading costs, or about 2% of the current value of the portfolio. Ouch. But the good news is that, though lack of trading, the lowering of brokerage commissions, and appreciation of the portfolio, over the years we expect this percentage to fall to a level where it is totally insignificant.

Last Friday, I previewed the forthcoming Independent Insurance results. Tuesday was the day of reckoning, and judging by the market's reaction, the results were well received. However, my career as Fool UK insurance analyst might be rather brief, given some of my predictions. For example, I said:

"1998 will undoubtedly see 1997 underwriting profit of £23.1m decline, as IIG have already announced a total of £18.5m of weather related losses, and this will come straight off their underwriting profit."

Actual results were a little distorted, because IIG changed their accounting policy. Nevertheless, 1998 underwriting profits were £27.5m, a truly tremendous performance. Remember that most companies make losses on their insurance business -- they use the insurance business as a means for creating an investment float.

Independent are different from your average insurance company. They very much see their core activity as being an insurance underwriter. You may think there's nothing odd in that, but if I told you that they made more money from their investments than insurance, that may change your thinking.

Net asset value, the measure by which many insurance companies are valued, increased 28% to £275.8m, although again this was against a restated base figure. With the shares now at 307.5p, that values IIG at just over £700m, meaning they trade on a price to book value (PTV) of 2.5. This is high for a run of the mill insurance company, but IIG are not of that ilk. They deliberately eschew premium growth when they would be writing unprofitable policies. In 1998, gross premiums written fell from £552m to £457m, yet profitability rose. In very few other businesses would a fall in "sales" be considered a positive.

For the last few years, Michael Bright, Chief Executive and driving force behind Independent Insurance, has been talking of the prospect of hardening insurance premiums. Each year, it hasn't happened. Perhaps 1999 will be different. Bright said he expects three years of strong growth and that Independent is positioned to benefit from the upturn in the insurance cycle. He is said to be comfortable with 1999 profits rising 10% year on year.

Whilst that doesn't sound particularly exciting, Independent should be able to increase their investment float as they write more business. Although understated by the company, this is the part of the business that I like. I see it as a double play on the stock market -- Independent are profitable as an insurance company and are probably valued by the market largely on the back of that. However, in the background, they are also making money through their exposure to the stock market. They could be viewed as some sort of profitable investment trust, where the investment funds come into the business at less than cost.

Anyway, enough for now about Independent Insurance. We'll keep our eye on them, but for the time being, things are looking good. There is, however, seemingly no pleasing some people. The discussions continue on the IIG message board.

Keep an eye out at the Berkshire Hathaway website (external link) over the weekend for Warren Buffett's 1998 letter to shareholders. It's an enlightening and entertaining read, as are all of the other letters going back to 1977. I've read them all, and as well as learning about general investment philosophies, I've also learnt a great deal about the insurance industry. Berkshire Hathaway is the biggest insurance company in the world. Buffett will probably have something to say about the general level of the stock market, but don't expect to find out anything more than we already know -- the market looks high based on historical standards, but corporate return on equity is high and interest rates are low. The party -- measured by consecutive 20%+ years of appreciation -- will come to an end sometime, but no-one, including Buffett, knows when.

Today is the BBC's annual Red Nose Day, and here at Fool HQ, we're decked out with suitable appendages. Since Comic Relief time began (back in 1986) over 3320 grants have been given to projects in the UK, totalling £47,082,438. Every pound donated to Comic Relief is spent on projects doing brilliant work tackling poverty and promoting social justice in the UK and Africa. Here's a link to the external Red Nose website, from which you can make your donation.

Qualiwatch

No news to report. As a reminder, the companies on our watch list and their target buy prices, are:

Glaxo Wellcome (GLXO) -- 1500p
Vodafone (VOD) -- 1000p

We could need a decent old market correction to pick up Glaxo, but Vodafone is within reach. We're patient.

Have you got any Qualiwatch suggestions? Stick them on the Qualiport message board alongside this post from algn. Very few, if any, quality companies are available now at attractive prices. This is not surprising, given the overall market is at an all time high. Nevertheless, we'll keep scouring the universe in search of Qualiport companies. If we find one that jumps our 15% per annum growth hurdle, we'll buy it regardless of the valuation of the overall market.

Lastly, it was good to see EMAP (EMA) admitted to the FTSE 100 Index this week. This shouldn't effect the share price, nor the underlying business, but I'd much rather see one of our companies going up in the world than down.

Have a great weekend, Fools. See you next Wednesday.

Company Change    Bid
DELL   -$1.50   $41.50 
EMA     -0.10    13.65
IIG     +0.06     3.03
MKS     +0.08     3.88
PIZ     +0.20     7.67
RTO     -0.10     3.60
ULVR    -0.07     5.91

Qualiport Stocks

Last Rec'd  Total #  Company     In At   Current  Change
 19/12/97    783     Rentokil     2.55     3.60    41.2%
 17/04/98    169     EMAP        11.34    13.65    20.3%
 27/10/98    755     Indep Ins    2.58     3.03    17.4%
 04/11/98    245     Pizza Exp    7.93     7.67    (3.2%)
 27/01/99     74     Dell (US)  $44.63   $41.50    (7.0%)
 17/07/98    298     Unilever     6.72     5.91   (12.1%)
 11/05/98    368     M & S        5.54     3.88   (29.9%)

Last Rec'd  Total #  Company     In At    Value    Change
 19/12/97    783     Rentokil   2046.53  2818.80   772.27
 17/04/98    169     EMAP       2341.32  2757.30   415.98
 27/10/98    755     Indep Ins  1972.64  2287.65   315.01
 04/11/98    245     Pizza Exp  1966.34  1879.15  (87.18)
 27/01/99     37     Dell (US)  2007.42  1861.21  (146.21)
 17/07/98    298     Unilever   2052.54  1761.18  (291.36)
 11/05/98    368     M & S      2054.11  1427.84  (626.27)

Cash:                                  £1,711.43
Current Total :                       £16,504.56

Total Invested:                       £16,184.62
Profit/(Loss) :                        £  319.94 

Value Per Share

                    Day      Month      Year      
Qualiport          0.03%     0.81%     -1.81%
FTSE 100          -0.84%     1.73%      6.79%
FTSE All Share    -0.47%     2.45%      8.26%

Click here for the latest Qualiport share price quotes.

For an explanation of Value Per Share accounting, please click here.