Business Overview
Hastings Group Holdings PLC (HSTG) is a Bexhill, United Kingdom-based agile, data and digitally focused general insurance company with more than 2.7 million live client policies and employing more than 3,400 colleagues at sites in Leicester, Bexhill, London, and Gibraltar. The group is digitally focused general insurance provider with emphasis across the insurance value chain, serving the home, bike, van and car insurance market. The company also provides home insurance, premium financing and ancillary products. Through embracing new technology and digital leadership, the company’s ambitious growth plans will be executed in the near term. Around 90 per cent of policies are directly underwritten by the company’s Gibraltar based insurer, Advantage Insurance Company Ltd. It operates as an insurance provider with two separate businesses, namely Retail business and Underwriting business. The group's brands include Hastings Direct, which is the company's largest and best-known brand, Hastings Premier, Hastings Essential, Hastings Direct smartmiles and many more. The company’s brand, like People’s Choice, offers insurance services at a competitive price and InsurePink provides competitive car insurance. The group’s actions are based on the 4Cs and emphasis is on getting it right for the Colleagues, Customers, Company and Community. The company is based in Bexhill-On-Sea, the United Kingdom and was founded in 1996. The shares of the company are listed on the London Stock Exchange and is a constituent of FTSE 250 index.  

On 27^th February 2020, the company will announce the 2019 full-year results.

Management

The current Chair is Gary Hoffman and was appointed on May 2018. Toby van der Meer holds the responsibilities of the Chief Executive Officer since 1^st March 2018. John Worth is the current Chief Financial Officer. He joined the Board in May 2019.

Key Statistics



Top Shareholders
 
 

Business Segments

The Group has two reportable trading segments - Underwriting and Retail. The Underwriting segment comprises of Advantage Insurance Company 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 the end customer pricing, fraud management, product design. It operates through Hastings Insurance Services Limited.

Business Model


(Source: Company’s Website)

Through a focused brand and multichannel distribution & product portfolio model, a data and disciplined driven approach to underwriting and agile pricing maximise value. The company has chosen to be attentive in the large United Kingdom’s private car insurance market, which presently accounts for LCP (live customer policies) of 87 per cent. Within this market, the main focus is on digital distribution through retail brands’ websites (by direct distribution) and price comparison websites (PCW). Through the group’s Underwriting and Retail businesses, the company operates across the insurance value chain. Clear separation is made between these businesses to ensure the Retail entity maximises customer capture and income with Underwriting entity receives the technical net rate, without negatively impacting Underwriting profitability.

Key Strengths

Sophisticated approach to data and analysis in pricing; agility in a price comparison way of working; market-leading innovative risk selection and counter-fraud management; low cost operating model; a focused set of products; separation between technical and retail pricing; a capital-efficient underwriting model; a simple and straightforward systems landscape; and an effective control framework and culture.

Market Overview

The market dynamics and recent trends offers ample opportunities on a continuing basis to stay ahead of the curve in terms of competitive positioning. The company aims at developing compelling products with accurate pricing, approach industry issues efficiently and focus on expanding long term sustainable growth. Around 60 per cent of clients now choose to interact with the group digitally, through email, web chat or MyAccount.

Trading Update for the year ending 31^st December 2019 (as on 17^th January 2020)

The company provides a trading update for the year ended 31^st December 2019. In the fourth quarter of 2019, the company has seen elevated claims costs, with uptick in the repair and third-party credit hire prices, marginally higher winter frequencies from the previous year, and a small number of larger bodily injury losses. Excluding the impact of the July Ogden rate change, the 2019 loss ratio is expected to be in between 81% and 82%. For 2019, the company’s adjusted operating profit was expected at £110 million. With the company’s emphasis on pricing discipline, it has continued to apply price increment ahead of the market, resulting in LCP (live customer policies) remaining widely flat over the H2 FY19 at 2.85 million as compared with the previous year, LCP stood at 5 per cent up, supported by robust retention rates in the year 2019. The group continues to maintain a robust capital position with the underwriting subsidiary Solvency II coverage ratio within the target range and stays strongly cash generative.

Financial Highlights (for the nine months ended 30 September 2019, £million)


(Source: Q3 Statement, Company’s Website)

Supported by strong retention rates, the company’s LCP was up by 5 per cent to 2.84 million as on 30th September 2019. The Gross written premiums surged by 2 per cent to GBP 753.1 million for the nine months period ending 30th September 2019. The change in the risk mix, aiming to reduce risk segments & a reduction in younger drivers offset the increase in premium prices. The company prioritise its pricing discipline in the Q3 period. The company’s applying rates stood in line with the first half claims inflation and were ahead of the market.

The company’s claims inflation stood in between 7 per cent to 8 per cent for the third quarter of FY2019.The company’s loss ratio for the calendar year stood at 79.1 per cent (before Ogden rate change impact) for the nine months period in the financial year 2019. Due to the lower reinsurance commissions and lower earned premiums for the period, the company’s net revenue declined by 2 per cent to GBP 563.8 million for the 9M financial year 2019. With the insertion of the company’s in-house Home underwriting and with support from the third-party panel members, the company’s Growth in Home stood to 200,000 LCP.

The company, with its focus on price comparison distribution, technology and the responsive business model remained well-positioned to react to the changes made by the FCA related to the general insurance pricing practices. The company has successfully been able to change its new repair service providers with superior customer experience. The company continued to apply technology and digital strategy into its businesses, which resulted in a reduction in customer service calls/ LCP by 15 per cent and nearly 60 per cent of total loss claims were settled using digital means.

Key Performance Indicators


(Source: Annual Report, Company’s Website)

Adjusted operating profit is the primary measure used to evaluate operating performance and indicates the results of underlying trading. The company’s Adjusted operating profit surged by 4 per cent to £190.6 million in the FY2018 versus £184.1 million in the FY2017.PAT (Profit after tax) is used to measure the performance of the company after the inclusion of interest expense and accounting effects for business combinations.

The company’s Profit after tax was up by 3 per cent to £130.6 million mainly because of an increase in the average premium and historical VAT refund.

The calendar year loss ratio is used to measure the underwriting performance of the company. The company has been able to achieve the ratio at the lower end of the targeted range despite the adverse weather conditions, which shows the company’s focus on claims management and underwriting discipline.

Expense ratioreflects the measure of underwriting operational efficiency, represented as the company’s share of incurred acquisition and other operational expenses as a percentage of net earned premiums. The company’s expense ratio increased by 0.4% to 14.4% in FY18 as compared with the corresponding period of the last year (FY17: 14%).

Combined operating ratiois used to measure the overall underwriting performance of the company, including the calendar year expense ratio and the loss ratio. The company’s Combined operating ratio stood at 89.4 per cent in FY2018, which shows operating and underwriting efficiency and discipline.

Live customer policiesare used to measure the total number of policies presently in force and are the main performance indicator for the Hastings Group Holdings. The company was able to achieve a 2.5 per cent growth in policies to 2.71 million customers.

Financial Ratios

 

The reported Loss Ratio in H1 FY2019 surged by 7.3 per cent to 81.1 per cent against 73.8 per cent reported last year for the same period, while this ratio is also higher than the industry median of 63.1%. The reported Combined Ratio in H1 FY2019 was up by 9.2 per cent to 96.9 per cent from 87.7 per cent reported last year for the same period and also higher than the industry median of 94%. The reported Investment Ratio of 1.9 per cent for the H1 FY2019 stood lower than the industry median of 14.1 per cent and is slightly higher than 1.7 per cent for H1 FY2018. The reported Reserves Change in H1 FY2019 was up by 1.5 per cent to 9.1 per cent from 7.6 per cent reported last year for the same period. Pre-tax Return on Assets for the H1 Financial year 2019 stood at 1.5 per cent, which was higher than the industry median of 0.7 per cent. Pre-tax return on equity for the H1 Financial year 2019 stood at 7.2 per cent, which remained flat as compared to the industry median. On leverage front, the debt-equity ratio of the Hastings Group Holdings Plc’s was 0.38x, which was same as compared to the industry median and slightly declined when compared with the same period of the last year.

Share Price Performance


Daily Chart as of January 27th, 2020, before the market close (Source: Thomson Reuters)

Hastings Group Holdings PLC shares were trading at GBX 180 at the time of writing before the market close (at 10:27 AM GMT) on 27th January 2020 and were down by 0.881% versus the previous day closing price. Stock 52 weeks High and Low are GBX 235.45/GBX 167.30. Today’s volume in the company’s share stood at 95,907. Stock’s average traded volume for 5 days was 1,051,835.40; 30 days – 631,280.27 and 90 days – 525,073.30. The traded (average) volume for five days was up by 66.62 per cent versus 30 days traded (average) volume. The group’s stock is reflecting significantly higher volatility as against the benchmark index based on the company’s beta of 1.53. The outstanding market capitalisation was around £1.20 billion, with a dividend yield of 7.43 per cent. The shares of the company have delivered a positive return of 0.45 per cent in the year to date basis.

Valuation Methodology

Method 1: Price to Earnings Approach (NTM)



To compare Hastings Group Holdings Plc with its peers, Price/Earnings multiple has been used. The peers are Sabre Insurance Group Plc (NTM Price/Earnings was 16.79), Saga Plc (NTM Price/Earnings was 5.64), Direct Line Insurance Group Plc (NTM Price/Earnings was 13.11), RSA Insurance Group Plc (NTM Price/Earnings was 11.82), Lancashire Holdings Ltd (NTM Price/Earnings was 14.54) and Admiral Group Plc (NTM Price/Earnings was 18.26). The median of Price/Earnings (NTM) of the company’s peers was 13.83x (approx.).

Method 2: Price to Book Value based approach (NTM) 
 


To compare Hastings Group Holdings Plc with its industry median, Price/Book Value multiple has been used. The industry median of Price/Book Value (NTM) was 1.90x (approx.).

Risk Assessments

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 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. 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.

Growth Prospects

Investment in future business helps in achieving further sales growth and operational efficiencies.The company reaffirmed its outlook and guidance for the full year 2019, as it enjoys competitive advantages in the large motor and home markets. The company is in an excellent position to profit from the customers’ push towards online sources, especially primarily price comparison websites, to buy insurance. The policy growth has been backed by a continued robust retention rate. The market share of the company in the UK private car insurance market segment increased to 7.8 per cent, from 7.5 per cent at 31 December 2018, and without chasing volume growth at the expense of profitability, it continues to work towards its target of 3 million customers base. Several initiatives by the group  will lay the foundation for the company to capitalise on its long-term profitable growth opportunities.

Conclusion

While the market environment has been challenging, with elevated claims inflation in Q4 FY19, the company stayed focused on the strategy of retaining pricing discipline, applying rate rises ahead of the market. During 2019, the company has also continued to make progress on the operational, technology, and strategic initiatives. The Board anticipates the total dividend of 2019 to be lower than in 2018. However, the group’s board stays confident in the ability to capitalise on its long-term profitable growth opportunities and therefore predicts to pay a total dividend above the company's stated 65%-75% target payout range. The company’s trading operations in 2020 were in line as expected.

Over the course of 4 years (FY14 - FY18), the company’s revenue surged from £380.80 million in FY14 to £757.7 million in FY18. Compounded annual growth rate (CAGR) stood at 18.77 per cent.

Based on the decent growth prospects and support from the valuation as done using the above two methods, we have given a “BUY” recommendation at the current price of GBX 179 (as on 27^th January 2020, before the market close at 11:12 AM GMT) with lower double-digit upside potential, based on 13.83x NTM Price/Earnings (approx.) on FY20E earnings per share (approx.) and 1.90x NTM Price/Book Value (approx.) on FY20E book value per share (approx.).
 
*All forecasted figures and Peer information have been taken from Thomson Reuters.

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