esure has received a proposal from Bain Capital to acquire it for 280p per share. Although no formal offer has been made, the esure board has indicated it would be inclined to accept a formal offer at that price.
280p per share is 37% above where the share price was the day before the news became public.
At this point there's no guarantee that a formal offer will be made.
esure may technically be an insurer, but it makes 68% of its money from cross-selling 'Non-underwritten additional services' to its customer base. That includes providing third party services to esure customers, such as breakdown assistance, motoring legal protection, and interest on instalment payments.
The focus on cross-selling reflects the fact that personal insurance is very competitive, and with the growth of comparison websites, increasingly driven by price.
It's difficult for insurers to retain customers and protect margins at the best of times, and esure's not had the best track record when it comes to underwriting - barely scraping into profit from insurance itself. Things have been improving, but esure's still some way off best in class.
It doesn't help that esure's two main consumer facing brands - esure and Sheila's Wheels - feel tired and do little to distinguish themselves from the crowd. It's hard to see why a consumer would choose either brand except because they're cheap.
However, struggling general insurers can turn themselves around - as Stephen Hester has proven at RSA - and that probably explains why Bain Capital is interested. esure has already been showing signs of progress, and increased marketing spend and a more intense focus on underwriting could deliver meaningful results.
An offer from Bain Capital would mean a significant proportion of the eventual benefits end up in shareholders pockets earlier than had been expected.
First Quarter Trading Update - 3 May 2018
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.
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.
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.
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.