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esure - Customer numbers and profits up

Nicholas Hyett | 10 March 2017 | A A A
esure -  Customer numbers and profits up

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esure Group plc Ordinary 1/12p

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Underlying full year profits after tax rose 18% in 2016, to £80.5m. The full year dividend rose 17% to 13.5p, with the final dividend of 10.5p including a 3.86p special dividend. The total payout is 70% of earnings per share.

The shares rose 6.8% in early trading.

Our View

Following the demerger of price comparison business GoCompare.com, esure is focussed exclusively on its personal insurance business. Unfortunately that market is very competitive, and with the growth of comparison websites increasingly driven by price. That makes it difficult for insurers to retain customers while also protecting margins.

Having said that, the UK motor insurance market is experiencing a bit of a let-up in price pressure at the moment, much to the relief of insurers. esure is no exception, but we can't help but feel that the core esure and Sheila's Wheels brands could do with a bit of love and attention.

Against that background it's perhaps no surprise that esure has looked elsewhere for revenue. The company continues to say 'insurer' above the door, but 'Non-underwritten additional services' accounted for 70% of trading profit. Among other things, the division offers third party services, such as breakdown assistance and motoring legal protection, to esure customers and collects interest on instalment payments.

The greater focus on the core insurance business post-demerger is welcome, and seems to be yielding results. The number of in-force policies is steadily increasing, rising 8.6% in 2016. Those extra policies mean more opportunities for bolt on services, while reduced pricing pressure fuelled premium growth of 19% for the full year.

The remaining esure group aims to pay out 50% of underlying group profit after tax, with further special dividends when appropriate. A £65m departing dividend from GoCompare provided a substantial boost to solvency ratios and could improve the outlook for special dividends going forwards.

The dividend policy has made for an erratic payout in the past. But, if the company can continue to increase the number of in-force policies, improve underwriting performance and cross-sell effectively, profits could start to motor, taking dividends along for the ride. The stock offers a prospective dividend of 4.6% for 2017.

Full Year Results

Gross written premiums increased 19% over the year, to £655m, with in force policies up 8.6% to 2.2 million. Profits from the group's investments operations increased 196% to £18.1m.

The increased customer numbers boosted performance in the group's non-underwritten additional services, which includes selling ancillary services and interest on instalment payments. This division remains by far the biggest contributor to group profit at £60m, compared to a £2.4m loss in Home underwriting and £8.9m profit in Motor.

The poor underwriting performance reflects a slight deterioration in the group's combined operating ratio, a key measure of underwriting performance, which rose from 97.8% to 98.8%.

The group's Solvency II capital position improved significantly to 149% (2015: 123%), thanks largely to a dividend from GoCompare prior to its demerger from the group. That supports the special dividend.

The group expect strong growth in both premiums and in-force policies in the coming year, at 15-20% and 5-10%, respectively. The combined operating ratio is expected to be in the region of 96-98%, with non-underwritten additional services revenues forecast to grow ahead of in-force policies.

Going forwards the group continues to target mid-single digit in earnings per share (2016: +3%), a cumulative £7bn in cash remittances to group in 2016-18 and an increased dividend pay-out ratio of 50% by 2017 (2016: 46%).

Unless otherwise stated, all estimated figures, including prospective dividend yields, are taken from a consensus of analyst forecasts compiled by Thomson Reuters. These estimates should not be taken as a reliable indicator of future performance.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.