Hastings Group Holdings PLC (HSTG) is a British holding company with focus across the insurance value chain. The group, along with its subsidiaries, offers general insurance products in the United Kingdom, with the primary focus on the UK motor market, including private car insurance, motorbike and van insurance. It also provides home insurance, premium financing and ancillary products. The company is based in Bexhill-On-Sea, the United Kingdom and was founded in 1995. It was listed on the London Stock Exchange in October 2015 and is a constituent of FTSE 250 index. Toby van der Meer, who joined the group in 2011 as Managing Director Retail, is the current Chief Executive Officer.

The group has grown to become one of the fastest growing general insurance providers in the UK and now have over 2.6 million live customer policies, which are supported by over 3,100 colleagues across sites in Bexhill, Leicester, London and Gibraltar. The group enjoys a 7.5 per cent market share. The company specialises in the British private car insurance market, accounting for 86 per cent of the company's live customer policies (‘LCP'). Within this segment, the company operates through price comparison websites and directly selling through retail brands' websites. The group also offers home, bike and van insurance. The operations are supported by complex IT systems to analyse and process applications, which helps to optimise the claims process and provide greater control to colleagues. Approximately 90 per cent of policies is underwritten by Advantage Insurance Company Limited, a Gibraltar based insurer. The group's brands include Hastings Direct, which is the company's largest and best-known brand, Hastings Premier, Hastings Essential, and many more.

Segments
The Group has two reportable trading segments – Underwriting and Retail – and corporate head office, which comprises the combined results of the Group's head office companies. The Underwriting segment comprises of Advantage Insurance Company Limited and its investment in Conquest House Limited. The principal operations of the segment are underwriting of general insurance, engaging in risk selection, underlying technical pricing, reserving and claims handling. The primary activity of the Retail segment is providing insurance intermediary services like end customer pricing, fraud management, product design. It operates through Hastings Insurance Services Limited. 

Key Statistics
 

Key Financial Metrics (for FY 2018, in £m)

(Source: Company Filings, LSE)

Key Financial Highlights (for FY 2018, in £m)

The Net earned premium rose by 7 per cent to £440.7 million in FY 2018, from £410.1 million in FY 2017. This reflects policy growth, gross written premiums increased to £958.3 million for the year, up 3 per cent from £930.8 million last year, and higher average written premium earning through growth in Retail income which rose by 4 per cent to £273.4 million, mainly driven by increased policy count.

The growth in operating expenses slowed down, due to strong expense discipline despite continued investment for the future. This led to growth in adjusted operating profit which increased by 4 per cent. However, if the impact of prior year VAT refund of £14.6 million and the effect of £7.0 million from Q1 weather events are excluded, adjusted operating profit was broadly flat at £183.0 million.The profit after tax increased by 3 per cent, reflecting solid operating performance. In FY 2018, the loss ratio was 75 per cent in comparison to 73 per cent in FY 2017, remaining at the bottom of the target range of 75 per cent to 79 per cent. The ratio increased due to adverse weather in the first quarter and claims inflation being higher than premium inflation; claims inflation rose during the year to 6 per cent. The group reported free cash generation of £167.7 million, reflecting strong growth of 42 per cent over the prior year. This helped the company to achieve its net debt leverage multiple target of around 1.0x during the year. The company reported a strong solvency position: underwriting subsidiary achieved Solvency II coverage ratio of 161 per cent, against 167 per cent in FY 2017. Before deducting the anticipated dividend of £55.0 million for the year, the ratio stood at 194 per cent. A final dividend of 9p per share for 2018 was proposed, vs 8.5p per share in FY 2017. Together with the interim dividend, the dividend payout ratio for the year equates to 58.8 per cent of adjusted profit after tax against 55.5 per cent in FY 2017. The total divided also increased by 7 per cent over the prior year.

Ratios
 
(Source: Thomson Reuters)

Ratios Commentary
In FY 2018, the loss ratio increased by two percentage points. This was mainly due to adverse weather conditions in the first quarter of the year and claims inflation being higher than premium inflation. The ratio is significantly more than the industry median. The combined operating ratio increased to 89.4 per cent, reflecting an increase in both the loss ratio and expense ratio. The change in premium earned experienced a significant increase to 31.4 per cent from 19.3 per cent in FY 2017; it was considerably more than the industry median. The company’s pretax ROA is higher than its peers, though it slightly fell in FY 2018. Similarly, the pretax ROE is more than the industry median. The assets/equity ratio of the company has remained stable over the periods. However, it is less than the industry median, indicating the company's equity backs a lower value of assets. The company’s debt/equity is slightly more than its competitors. However, the company’s leveraged position has improved against the last year data and is inching towards the industry median.

Valuation Methodology
Method 1: Price/Earnings Multiple Approach (NTM)


Method 2: Price/Book Multiple Approach (NTM)  


To compare Hastings Group with its peers, Price/Book value has been used. The peers are Direct Line Insurance Group PLC(NTM P/B was 1.79), Admiral Group PLC (NTM P/B was 8.95),RSA Insurance Group PLC(NTM P/B was 1.34), Hiscox Ltd(NTM P/B was 2.34) andBeazley PLC(NTM P/B was 2.29). The median of Price/Book (NTM) of the company’s peers was 2.29x.
 
* All forecasted figures and Peer selection have been taken from Thomson Reuters.

Share Price Commentary
 
(Source: Thomson Reuters)

On 5 March 2019, at the time of writing (before market close), HSTG shares were trading at GBX 219.6, down by 0.4 per cent against its previous day closing price. Stock's 52 weeks High and Low is GBX 292.00 /GBX 169.50. At the time of writing, the share was trading 24.66 per cent lower than its 52w High and 29.79 per cent higher than its 52w low. Stock’s average traded volume for 5 days was 1,510,203.00; 30 days - 1,016,493.63 and 90 days - 835,488.37. The average traded volume for 5 days was down by 48.57 per cent as compared to 30 days average traded volume. On the valuation front, the stock was trading at a trailing twelve months PE multiple of 10x as compared to the industry median of 14.7x. The company’s stock beta was 1.63, reflecting relatively more volatility as compared to the benchmark index. Total outstanding market capitalisation was around £1.45 billion and a dividend yield of 6.14 per cent.

 
Risks Assessment and Growth Prospects

The strong capital position and continuing cash generation has prompted the company to increase its target dividend payout ratio to a range of 65 per cent to 75 per cent in future. The management foresees significant growth opportunities in both its core motor and home markets. For the tenth year in a row, the group expanded its customer base and now is an established name in the market. Moreover, customers are increasingly using primarily price comparison websites to buy insurance. Changing market dynamics along with a continued programme of investment in digital capabilities augur well for the group's future growth. The UK's exit from the EU is not expected to materially impact the need for UK motorists and households to obtain insurance and therefore is less likely to influence the group's performance directly. However, any sustained economic downturn that may follow Brexit could increase the risk to the strategic plans and reduce the Group's income from investments. Growth in underwriting home policies is supported by the addition of three new panel members during the second half of 2018. The group is highly exposed to exogenous factors which can severely affect its performance. The potential for a rise in frequency and severity of claims due to climate change can reduce the group's performance. Fundamental changes in the motor industry, most notably electric and autonomous vehicles, can change the nature of the motor insurance industry, something the company may not be prepared for.

Conclusion
The company is relatively immune from the volatility arising from Brexit uncertainties and is in excellent position to profit from the customers' push towards online sources, especially primarily price comparison websites, to buy insurance. There are significant growth opportunities in both its core motor and home markets. Based on strong fundamental performance and the valuation done using the above two methods, we have given a BUY recommendation with single-digit upside potential based on 12.9x NTM Price/Earnings on FY19E earnings per share and 2.29x NTM Price/Book on FY19E Book value per share.

Note- GBp or GBX are interchangeably used for Pence Sterling.

Disclaimer

PLEASE BE ADVISED THAT YOUR CONTINUED USE OF THIS SITE OR THE INFORMATION PROVIDED HEREIN SHALL INDICATE YOUR CONSENT AND AGREEMENT TO THESE TERMS.
References to ‘Kalkine’, ‘we’, ‘our’ and ‘us’ refer to Kalkine Limited.
This website is a service of Kalkine Limited. Kalkine Limited is a private limited company, incorporated in England and Wales with registration number 07903332.
The website has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. Kalkine is not responsible for material posted on this website and does not guarantee the content, accuracy, or use of the content in this site. No advice or information, whether oral or written, obtained by you from Kalkine or through or from the service shall create any warranty not expressly stated.
Kalkine do not offer financial advice based upon your personal financial situation or goals, and we shall NOT be held liable for any investment or trading losses you may incur by using the opinions expressed in our publications, market updates, news alerts and corporate profiles. Kalkine does not in any way endorse or recommend individuals, products or services that may be discussed on this site. You should discuss your portfolios and the risk tolerance level appropriate for your personal financial situation, with a professional licensed financial planner and adviser. Our publications are NOT a solicitation or recommendation to buy, sell or hold.