The latest hot firm to list on the London Stock Exchange is British insurer Esure. It's being brought to market by founder Peter Wood, who has set up seven insurers including Direct Line, which successfully listed last October in three different countries during his career.
Esure is expected to enter the FTSE 250 with a valuation of between about £1bn and £1.3bn, making it the biggest London initial public offering (IPO) so far this year. That would value the firm at around four times what Wood and private-equity group Tosca Penta paid when they took it from Lloyds Banking Group four years ago a very nice profit indeed. But should you buy in as they unload?
What's on offer?
Esure is a general insurer, competing with the likes of Admiral and Direct Line. Its main markets are home insurance (it has a 2% market share) and car insurance (5% market share). It also offers holiday and pet policies. More than 80% of sales are made online.
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Its brands include Sheilas' Wheels, which targets female drivers. It also owns a half-share in price-comparison site Gocompare.com, although the plan is to offload this in a separate sale.
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The firm is known for running a low-risk insurance book. As The Daily Telegraph's Emma Simon notes, 98% of the houses insured are at low risk of flooding, while 95% of the car insurance policies sold by Sheilas' Wheels are to women, who are deemed lower risk drivers than men. Also, nearly all of the motor policies sold are to those aged 30 or above, again cutting risk.
The strategy has paid off from 2008 to 2012, the business grew at an annual compound rate of 24%. In 2012, pre-tax profit doubled to £116m. That's partly due to tight cost management, says Rene Schultes in The Wall Street Journal. Esure had a combined operating ratio of 92.8% in 2012, below Admiral (96.6%) and Direct Line (99.2%). The lower the better: over 100% indicates a loss-making firm.
Will Esure keep delivering?
Esure hopes to benefit from new European rules for gender-neutral pricing of car insurance. As Schultes notes, it can either follow rivals and raise premiums for women drivers, who account for 64% of its policies, or it can hold them flat and grab market share. It also plans to start offering breakdown cover and lost-key cover.
Another positive is that legal referral fees in personal injury cases are being banned from April. This is a double-edged development (see below), but it should result in fewer whiplash claims. Meanwhile, Esure may be able to boost its low share of the home insurance market.
What could go wrong?
The high incidence of whiplash claims allowed car insurers to hike premiums in 2010 and 2011. Now they will come under pressure to cut comprehensive premiums were down 12.7% in 2012, reports the Confused.com/TowerWatson Car Insurance Price Index. As Heather Connon points out on Interactive Investor, there are icebergs ahead for all insurers.
The Competition Commission is still investigating motor industry malpractices, such as directing where car repairs should be carried out. For home insurers, unpredictable weather is becoming a big issue the group's loss ratio, which measures the impact of claims, went from 104% in 2010's big freeze to just 55% in 2011 it's all over the shop. And online firms are always vulnerable to rivals and newcomers.
Should you buy?
Assuming Esure can deliver a repeat of last year's growth in 2013, then given a mid-point valuation of £1.1bn when it floats, it will trade on a forward price/earnings(p/e) of about 11. That's well below Admiral and close to Direct Line. Its plan to pay out 50% of post-tax profits each year means it should offer a dividend yield of around 6%, which looks good value.
