'Co-op's strengths cannot be ignored'

How much are insurance companies worth? Should you pay more attention to past performance or future prospects? These questions and more will face would-be buyers of the Co-op’s general insurance business, put up for sale last week.

Determining the right price will not be easy. The Co-op’s GI business is a bit of a curate’s egg. The challenge will be deciding whether the good parts are enough to justify paying a premium for the company’s 2012 net tangible asset value of £276.1m.

Co-op’s underwriting results have been underwhelming for the past five years, largely driven by the motor book, which makes up most of its portfolio. Co-op GI has made pre-tax profits in four of the past five years, but they have been volatile, rising to a peak of £32.3m in 2011 from a trough of £1.5m in 2009.

Also, because of the consistent underwriting losses, the profits have relied heavily on investment performance. Low interest rates make these returns unreliable for future years.

The £50m motor reserve strengthening the company did in 2012 might make some buyers stop and ask questions.

Most of Co-op’s peers have got their personal motor reserve strengthening out of the way and are now worrying more about employers’ liability claims.

But the business’s strengths cannot be ignored. Its household book, while smaller than the motor business, has put in market-leading performances for the past two years.

Co-op’s prowess in telematics is particularly compelling.

A decent telematics offering is likely to be a big competitive advantage in the coming years. The Co-op’s product will arguably be more accurate than most because it has been running for longer and so has gathered more data.

If suitors can look past the rough-looking exterior of the headline combined operating ratios, they will find gems.

Whether these gems are worth the £600m the Co-op is rumoured to be seeking are another matter.