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esure - weather hits profits, formal offer received

Nicholas Hyett | 14 August 2018 | A A A
esure - weather hits profits, formal offer received

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Cold weather earlier in the year meant profit before tax in the first half fell 20% to £36.1m. Excluding this impact profits would have risen to £50.1m - an 11% improvement year-on-year.

Bain Capital has now made a formal, all cash offer for the group of 280p per share. This is a 37% premium to the share price the day before the offer and has been recommended by the board - subject to shareholder and regulatory approval. There will be no interim dividend.

The shares rose 3.9% in early trading to 277p.

View the latest share price and how to deal

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 at the best of times, and esure's not had the best track record when it comes to underwriting. It barely scraped into profit from insurance last year. 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.

That means that while esure may technically be an insurer, it makes 77% of its profit from cross-selling 'Non-underwritten additional services' to its customer base. That includes third party services such as breakdown assistance, motoring legal protection, and interest on instalment payments.

However, struggling general insurers can turn themselves around - as Stephen Hester has proven at RSA. esure has already been showing signs of progress, and increased marketing spend and a more intense focus on underwriting could deliver meaningful results. That probably explains why Bain Capital is interested.

In accepting the offer, the board seem to have decided it's a good deal.

The offer is a generous premium to the recent share price - although still lower than the share price was a year ago. Still, it should mean a significant proportion of the eventual benefits from a turnaround will end up in shareholders pockets earlier than had been expected.

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Half Year Results

The number of in-force policies rose 8.5% in the year to 2.4m, with growth in Motor, up 13%, more than offsetting an 8% decline in Home. Gross written premiums of £440.3m rose 12%.

Combined operating ratio, a key measure of underwriting performance, deteriorated by 4.3 percentage points to 100.9% - as weather related claims offset an underlying improvement in costs.

Trading profit in Motor rose 2.9% to £49.5m - driven by improvements in non-underwritten additional services, which more than offset weakness in underwriting and investments.

Home insurance reported an overall loss of £7.3m, compared to a profit of £3.4m last year. That included an underwriting loss of £11.8m, non-underwritten profit of £4.2m and investment income of £0.3m.

Negative free cash flow, meant esure's solvency ratio, an important measure of an insurer's capitalisation, fell three percentage points to 154%.

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

Find out more about esure shares including how to invest

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.