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esure - Motor drives significant improvements

Nicholas Hyett | 7 March 2018 | A A A
esure -  Motor drives significant improvements

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Gross written premiums were up 25.2% in 2017 to £820.2m. Growth reflects a 9.2% increase in in-force policies, to 2.4m, and improved pricing. Profits before tax rose 35.6% to £98.6m.

The company announced a final dividend of 9.4p, ensuring the full year payment is in-line with last year - or a 31% increase after adjusting for the Gocompare.com spin off in 2016.

The shares rose 1.4% in early trading.

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Our View

Personal insurance is very competitive, and with the growth of comparison websites, increasingly driven by price. That makes it difficult for insurers to retain customers and protect margins.

Against that background it's perhaps no surprise that esure has looked elsewhere for profits. It still says 'insurer' above the door, but 'Non-underwritten additional services' account for 68% of trading profit. That includes providing third party services to esure customers, such as breakdown assistance and motoring legal protection, and interest on instalment payments.

However, the greater focus on the core insurance business following the demerger of GoCompare.com in 2016 is welcome, and seems to be yielding results.

Policy numbers are increasing rapidly and underwriting performance is improving, albeit from a very low base. Extra policies mean more opportunities for bolt on services, while reduced pricing pressure across the motor insurance industry is fuelling premium growth.

In the medium term we're slightly concerned that esure's own brands, esure and Sheila's Wheels, are a little worn out and will have to 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's made for an erratic payment 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 6.2% for 2018.

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Full year results

esure saw a meaningful improvement in underwriting performance in 2017. The group's combined operating ratio (total expenses, included claims, divided by total premiums) fell 2.1 percentage points to 96.7%.

The improvement was driven by Motor, which also boosted growth in premiums and in-force policies. The division delivered trading profits of £102.7m in the year (2016: £75.7m), with underwriting profits up 180% to £24.9m and a 30% increase in profits from the sale of non-underwritten additional services to £65.8m. Profits from investments fell 25% to £12m.

Home insurance saw declines in both in-force policies and gross written polices, down 6% and 16% respectively. The division posted a trading profit of £8.6m, with an underwriting loss of £2.3m, non-underwritten additional services profits of £9.9m and investment profits of £1m.

The group's Solvency ratio (a key measure of insurers' capitalisation) was three percentage points higher at the year end at 155%.

Management expect to deliver a similar combined operating ratio in 2018 as 2017, with the group on course to reach 3 million in force policies by 2020.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not 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.