JP Morgan Cazenove has downgraded car insurance outfit Hastings Insurance Group PLC (LON:HSTG) to ‘neutral’ from ‘overweight’, reversing a rating change it made in March.
The broker said the UK motor market continues to see pressure on pricing, which JPM believes is driven by regulatory reform (such as changes to the Ogden rate calculation), improvements in accident frequency trends and increased competitive activity.
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In its full-year results statement issued on March 1, Hastings said the competitive environment continued to be intense, with slower premium inflation since the end of the third quarter than that experienced in the first half of 2017 following the proposed Ogden rate review.
JPM said the insurer was one of the first to react to the new environment by slowing its growth in the fourth quarter of 2017 and with average premiums looking set to decline year-on-year. It has further reduced its top-line estimates.
“Given the increase in reinsurance costs this year and unhelpful weather trends, we see downside risk to the current consensus, which leaves us uncomfortable with an overweight rating heading towards the first half results,” the broker said.
While its current stance is neutral, the broker said it is simply waiting for a more attractive entry point.
“In our view, Hastings’s business model replicates many of the attributes that have made Admiral successful, and over time, we expect them to continue to take share profitably,” the broker said.
JPM also expects the dividend pay-out ratio to be revisited in 2019 and is predicting that, based on the current share price and JPM’s forecast dividend, the dividend yield will rise to 7.9%.
Shares in Hastings fell 12p to 240.2p following the downgrade. JPM has a price target of 315p for the stock.