Why car insurer Hastings is dirt cheap

Hastings got its IPO away at a difficult time for the stockmarket. But, seven months on, the insurance company has staged an impressive recovery since finance stocks got hammered in February. In fact, last week's first-quarter results were so good it now offers the highest earnings growth in the sector, but on the cheapest multiple.

Based in Bexhill-on-Sea, about five miles west along the south coast from Hastings town, the insurer has just increased its share of the car insurance market to 6%. Gross written premiums rose by 29% in the three months ended 31 March to £171 million. Net revenue jumped 22% to nearly £133 million.

"Based on the continuing positive momentum in the business, we remain confident of delivering against our expectations and targets for all of our stakeholders," said chief executive Gary Hoffman.

At IPO, it aimed for a calendar year net loss ratio of 75-79% through the cycle, which it has achieved. Net debt leverage of 2.5 times at IPO was beaten at the full-year results in March, and 1.5 times by 2017 is within sight, while a dividend payout ratio of 50-60% has been honoured too. Its Solvency II ratio is also ahead of the 150% level guided at IPO.

Solvency II is a new set of rules governing the amount of capital European insurers must hold to reduce the risk of insolvency. Introduced in January, it must be enough to give 99.8% probability that it can meet its obligations over the next year.

Hastings said it wanted live customer policies to exceed 2.5 million by 2017. It already has 2.1 million, according to Monday's numbers, up 17% year-on-year.

After raising over £200 million from its flotation last October at 170p, valuing the business at £1.1 billion, Hastings shares nudged 185p two months later. That's still its best price, as it got caught up in the wider market panic at the beginning of 2016. But the market is beginning to take notice, and they're up over a third since.

"We believe Hastings is trading at a discount to its peers due to its relatively short track record, but first-quarter 2016 was another positive data point as it builds credibility with investors," says Alan Devlin, an analyst at Barclays.

"The company is delivering industry leading policy growth of +17%, but not at the expense of pricing. Its price increases of c12% are in line with the various market indices, in line with esure and ahead of Direct Line.

"Hastings is our best idea among the UK Motor insurers, as it offers both the highest earnings growth in the sector on the cheapest multiple, only 8.7x FY 2017 operating earnings."

As it builds a track record, the shares should narrow the discount to rivals and re-rate, reckons Devlin.

Hastings' price/earnings multiple excludes non-cash amortisation, which depresses net income. As operating earnings are also the basis on which dividends are based, it seems a fair metric to use.

Esure trades on 12 times. On a net income basis, Hastings trades on 10.3 times, RSA, 12.6 times, esure 13.3 times, Direct Line 12 times and Admiral - the most expensive of the lot, but with a great track record of performance - on 16.4 times.

As Barclays' top pick in the UK motor insurance sector, the broker tips the shares to hit 224p, implying 27% potential upside.

Remember, too, that even though Hastings pays out less of its cash earnings to shareholders, there's still currently a prospective dividend yield of 5.4%.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.