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Hastings, Esure outperform peers in tough UK motor insurance market

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Hastings, Esure outperform peers in tough UK motor insurance market

Listed U.K. motor insurers Esure Group Plc and Hastings Group Holdings Plc have seen their share prices surge in 2017, shrugging off pressures on their sector, particularly from an unexpectedly steep cut in a key discount rate.

Esure was by a small margin the stronger of the two, up 27.9% between Dec. 30, 2016, and Dec. 20, 2017, with Hastings shares rising 27.5% over the same span. But the story was different for the two longer-established listed U.K. motor insurers: Admiral Group Plc's share price growth was a far more muted 5.5%, while Direct Line Insurance Group Plc's share price fell by 0.2%.

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Hastings and Esure outperformed because of their fast growth in gross written premiums and policy counts compared with their peers — partly thanks to the price increases spurred by the cut in the personal injury discount rate, also known as the Ogden rate. The rate is used to calculate the amount insurers must pay out for long-term claims and reflects the expected gains claimants could receive from investing their payouts.

The cut to negative 0.75% from 2.5% greatly increased insurers' claims bills, and they pushed up the premium rates they charge customers to compensate.

Esure and Hastings "are the two fastest-growing stocks in the listed [insurance] sector," said Nick Johnson, an insurance analyst at Numis Securities. "The fact that the hardening of motor rates continued throughout most of the year benefited those companies with a strong growth agenda, of which Esure and Hastings are probably the most prominent."

The two companies' relative youth and reaction speed also helped, said Peel Hunt insurance analyst Andreas van Embden. "Because they have a very agile business model that can react quite quickly to changes in the market, whether it is changes in competitive behavior or changes in rates, they can incrementally boost their volumes and be more competitive than others."

Esure and Hastings also took smaller financial hits from the Ogden rate change than their peers. Hastings took a £20 million charge to its 2016 results, and Esure's hit was less than £1 million. By contrast, Ogden cut Direct Line Group's 2016 operating profit by £175.1 million.

"Esure and Hastings took a little hit but their reinsurance retentions were so low and their book of business so young that they were able to sail through the Ogden changes at the end of February with little damage," said Shore Capital insurance analyst Eamonn Flanagan. And because they suffered less, Esure and Hastings were able to price more keenly than their peers, he noted.

"The big boys — RSA, Aviva, Direct Line and Admiral — had to put rates up by 10% to compensate for Ogden. [Esure and Hastings] could put them up by 7% or 8% and gain quite a lot of market share, which is exactly what has happened through the price comparison sites," Flanagan said.

Prices drove growth in 2017, but it is difficult to predict how prices will react in 2018. After several quarters of increases, the average cost of a car insurance policy in the U.K. fell to £838 in the third quarter of 2017 from £847 in the second quarter, according to the Confused.com/Willis Towers Watson car insurance price index.

Two events that could push rates down are a pending increase to the Ogden rate and personal injury reforms that could reduce claims bills. But with government attention keenly focused on Brexit, it is not clear when, or if, the laws will come into force to effect these changes.

Meanwhile, an opposing force could be reinsurance rates. Most U.K. motor insurers' excess-of-loss reinsurance policies, which limit their claims payouts to a set sum, renew Jan. 1. U.K. motor excess-of-loss rates are expected to rise because of the Ogden cut, and insurers to boost their own prices to compensate. Esure, whose reinsurance renewed July 1, saw its motor excess-of-loss rates rise by a third.

"The higher reinsurance costs that are likely next year as a result of Ogden, probably [are] quite supportive of current rates, so I think [they] will be fairly stable," Johnson said.

Van Embden argued that reinsurance-fueled price increases may have already kicked in: "You will probably have a bit of an effect from the reinsurance renewals on Jan. 1, but most insurers have already passed on most of that to policyholders this year." But he agreed that "rates will plateau" in 2018.

Whatever happens, the U.K.'s motor insurers could be in for another tough year. Flanagan said: "The current circumstances are all tied up with what Ogden, rates and price comparison sites are doing. I don't see any good news out there at all for the industry on any of those three issues."

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