Can Hastings pull through the current crisis in investor confidence?
By Saxon East
Two years ago Hastings’ shares were at an all-time high, bursting through the 300p barrier.
Fast forward to today and the share price has been sliced in half, languishing not far above its initial 168p initial listing price.
What has dented the confidence? Can Hastings pull out of this trough?
The Bexhill-on-Sea-based firm has struggled with claims inflation. A cocktail of factors is to blame – the rising cost of fixing computerised cars, more expensive labour, the falling pound making imported vehicle parts dearer, inflated credit hire bills and a slew of costly injury claims.
Most concerning to investors is that Hastings for several quarters has stated its loss ratio will be at the ‘upper end’ of the 75% to 79% target range.
Now even this target range looks like it has been breached, with Hastings revealing in its third quarter October results that this year’s pre-Ogden loss ratio has fallen just outside at 79.1%.
There is little room for manoeuvre. Bad winter weather could now completely blow the lid off this target range.
Belief in Hastings
Despite these pressures, Hastings has a number of supporters.
The common theme is that Hastings is more vulnerable to the current downward trends in prices, and once the market recovers, Hastings will bounce back.
Shore Capital analyst Paul De’Ath said: “Hastings’ business model is geared into rising motor prices more than many of its peers due to its desire for growth (notwithstanding the current profit focus) and its focus on price comparison websites as its primary distribution channel.
”Rising prices tend to generate more switching and more opportunities to utilise its advanced pricing models.
“While the business is doing all the right things to improve its own claims handling and anti-fraud capabilities, the competitive nature of the motor insurance market means that the pricing cycle has yet to turn.
”We continue to believe in the long-term prospects of the business but in the near-term there is likely to be continued pressure on earnings in 2019F.”
As well as being one of the greatest beneficiaries of rising prices, Peel Hunt believes Hastings is well placed for the FCA’s pricing crackdown.
Hastings is less likely put customers on price escalators - because it is naturally a higher churn business, Peel Hunt said.
Furthemore, if the regulator comes out with remedies that encourage greater switching, it will lead to more customers flocking to price comparison sites and into the arms of Hastings.
Peel Hunt said: “Over 90% of Hastings’ policy volumes are transacted over PCWs, the most price competitive distribution channel in the most commoditised insurance segment (motor) of the market.
“Customers that purchase Hastings policies are likely to be active switchers and very price sensitive at renewal.
“Therefore, the likelihood of Hastings ‘price walking’ customers on renewal is lower than for peers that distribute through brokers or direct.
“Hastings’ retention rate is in the mid 70s, hence there is a significant churn of the in-force book. It is more likely that loyal Hastings customers stay because they are getting a competitive quote rather than because of any loyalty to the Hastings brand.”
Responsible pricing
One of Hastings biggest supporters has been Berenberg, which said the broking group has one been one of the more responsible players putting through prices rises.
They also praise the strategy of its young chief executive, 42-year-old Toby van der Meer.
“We believe Hastings’ strategic initiatives are beginning to pay dividends. Its implementation of Guidewire is now producing results.
“Retention rates are up by 5ppt and net promoter scores are improving.
“Over half of claims are now handled entirely digitally. New claims partnerships coming online should also help insulate Hastings from some of the more egregious claims inflation trends and improve customer service.
“We view these steps positively; however, we accept that pricing is more important in the short term,” the bank wrote at the half-way point this year.
As well as the price increases, Van der Meer has been busy targeting less risky motorists and trimming the number of young drivers on its books.
”We maintained focus on pricing discipline, applying rates ahead of the market, in line with our stated targets and strategy.
“We are confident that continuing to invest in our growth opportunities whilst navigating these current market conditions is the right thing to do,” he said following the third-quarter results.
Despite the claims issues, the bottom line is that the Hastings still has a lot of positive sentiment.
When the market turns, many believe the better days will return again.
But if Hastings loss ratio continues to deteriorate, even with help from rising prices, new and more worrying conclusions about the business model will likely surface.
The narrative may take hold that it is fighting something more sinister, namely a long-term endemic problem of having grown too quickly, in risky segments, and in a brutally competitive market.
One thing is for sure: this is one story that will continue to have legs for some time yet.
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