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esure - Piling on motor insurance policies

Nicholas Hyett | 4 May 2017 | A A A
esure - Piling on motor insurance policies

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A brief trading update from esure showed the group making big strides in motor insurance, although home insurance has proven a struggle.

The shares rose 1% on the day of the announcement.

Our View

Following the demerger of price comparison business GoCompare.com, esure is focused 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, although 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' account 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 increasing, and should continue to grow rapidly if recent trends are sustained. Those extra policies would mean more opportunities for bolt on services, while reduced pricing pressure is fuelling premium growth.

esure 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 4.4% for 2017.

First Quarter Trading Update

Gross written premiums increased by 24% in the first quarter. Growth in Motor premiums, up 29% to £116m, was partly offset by a 4.5% fall in Home premiums, now at £21m. These changes reflected 15% growth in the number of in-force Motor policies and a 6% fall in Home.

Motor has seen prices rise, with esure starting to increase prices in response to the changes in the Ogden rate earlier this year. Conditions in the home insurance market remain challenging and the group does not believe current market conditions provide opportunities for profitable growth.

Additional service revenue, essentially covering ancillary services sold to esure insurance customers, rose 11% to £28.2m.

CEO Stuart Vann commented;

"Overall, we have started 2017 better than we expected and we are firmly on track to deliver results at the more positive end of the 2017 guidance we issued at the time of our 2016 full year results in March."

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.