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ShoreCap undercover digging finds insurers not quite walking the talk, upgrades Hastings

Broker upgraded Hastings Group to 'buy' as it would be most affected by a pricing upturn in the motor insurance market

Undercover work by ShoreCap revealed which companies were bringing prices down

Some insurers are not quite practising what they preach, according to analysts at Shore Capital who have done some undercover detective work on the sector.

Trading updates for the first quarter indicated the motor insurance market continues to be challenging amid a combination of higher claims inflation and less than required price increases.

READ: Barclays sees motor insurance premium cycle turning up

“But if all the listed players are focused on value rather than volume, why are prices still under pressure?” ShoreCap wondered in a note to clients on Thursday.  

“We have conducted some mystery shopping via price comparison websites to understand who is cheapest and therefore bringing prices down.”

While this undercover work showed smaller market participants are undercutting in a number of areas, the broker found that the usual suspects of Aviva PLC (LON:AV.), Admiral Group PLC (LON:ADM) and Hastings Group Hldg PLC (LON:HSTG) are also “defending their positions more than their company announcements may suggest”.

Contrary to other analysts’ suggestions, ShoreCap said that both confused.com’s motor price index and the ABI’s own index actual prices show continued declines in motor pricing, with the decline in prices smaller than seen in 2018 but not yet at the point of price increases.

Given that prices overall are on a downward trend, the actions of Aviva, Admiral and Hastings suggests “there is more of a willingness to price to maintain market share or growth, rather than to support profits”.

READ: Hastings shares pranged by margin caution

Running the variables through its models, ShoreCap upgraded Hastings to a ‘buy’ rating from ‘hold’ due to a 10% upside to its estimated fair value, with limited effects for most of the others in the sector.

Hastings’ shares have been significantly impacted by the market dynamics in UK motor, down 44% since the start of 2018, as it is possibly the most exposed to that market.

“The news at Q1 2019 that the loss ratio would be towards the upper end of the target range (we assume 78%) has produced an overreaction in the share price, in our view,” ShoreCap said.

While market conditions are far from ideal at the moment “there are green shoots of a pricing turn which would reenergise the Hastings growth model”.

Admiral remained a 'sell' for ShoreCap, with Direct Line Insurance Group PLC (LON:DLG) the broker's preferred option within the UK personal lines insurers.

Quick facts: Hastings Group Holdings PLC

Price: 178.5 GBX

Market: LSE
Market Cap: £1.18 billion

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