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esure - Motor steps up a gear

Nicholas Hyett | 3 May 2018 | A A A
esure - Motor steps up a gear

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The number of in-force policies at esure rose 9.2% in the first quarter, driven by motor insurance. Gross written premiums rose 18%, thanks to an improving price environment.

The shares were broadly flat 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 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, motoring legal protection, and interest on instalment payments.

Increasing policy numbers mean more opportunities for bolt on services, while reduced pricing pressure across the motor insurance industry is fuelling premium growth and helping boost underwriting performance.

In the medium term we're slightly concerned 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 as dividends, with further special dividends when appropriate. That's made for an erratic payment in the past. But, if the company can continue to increase policy numbers, 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 around 6.7% for 2018.

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First Quarter Trading Update

Total in-force policies hit 2.4m in Q1, with gross written premiums of £221.1m.

The strong quarterly result was entirely down to motor, with policy numbers up 16.5% to 2m and premiums of £201.4m up 21.1%. This was partially offset by a weaker Home insurance result, where policies fell 13.4% to 0.5m, with premiums down 6.2% to £19.8m.

The cold weather earlier in the year resulted in £8m of home insurance claims, £6m more than originally expected. Adjusting for these costs, management expect to deliver a similar underwriting performance to 2017.

esure continues to target 3m in-force policies by 2020.

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One of HL's non-executive directors is also a non-executive director at esure.

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. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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.