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esure - Continuing to motor

Nicholas Hyett | 8 November 2017 | A A A
esure - Continuing to motor

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Continuing strength in Motor insurance means that gross written premiums of £625.8m are up 25.4% year to date, with in-force policies up 10.4% to 2.3m.

Management now expect to exceed previous guidance for the full year, with premium growth of 20-25% and a combined operating ratio at the lower end of 96-98%.

The shares rose 4.9% in early trading.

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.

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 62% of first half 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 is welcome, and seems to be yielding results. The number of in-force policies is increasing rapidly and underwriting performance is improving, albeit from a very low base. Those extra policies mean more opportunities for bolt on services, while reduced pricing pressure across the industry is fuelling premium growth.

In the medium term we're slightly concerned that esure's two main brands, esure and Sheila's Wheels, are a little worn out and that the group will have rely on pricing to draw in new business. That doesn't bode well for the underwriters, but it's been a long time since underwriting was a major contributor to group profit.

esure aims to pay out 50% of underlying group profit after tax, with further special dividends when appropriate. That 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 currently offers a prospective dividend of 5.2% for 2018.

Third Quarter Results

esure delivered a record quarter of premiums at £233m.

Motor has continued its strong run, with year-to-date gross written premiums up 30.4% at £561.5m and in-force policies of 1.8m up 19.6%. Meanwhile Home has continued to struggle, with gross written premiums falling 6% to £64.3m and in-force policies down 14.1% to 494,000.

Additional services revenue is up 16.1% to £93.6m so far this year.

CEO Stuart Vann said; "We approach 2018 with confidence and remain well placed to deliver our 3 million in-force policy ambition by 2020."

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