Claims costs put a dent in Hastings

Car insurer Hastings is squeezed by rising costs, but still left the interim dividend untouched today.

A generous dividend from car insurer Hastings (LSE:HSTG) failed to cushion the blow of falling profits today, as the FTSE 250 Index stock came under more pressure from rising claims costs.

While Hastings boosted its average premium by 3% in the first six months of 2019, this was more than offset by "elevated" claims inflation of between 6% and 7% caused by higher repair invoices on paints, parts and labour.

The resulting underlying operating loss ratio of 79.1% was at the top end of the company's 75%-79% range and compared with 73.8% a year earlier. It also excludes the recent change to the Ogden rate used to calculate compensation awards for personal injury claims.

Insurers were dealt a blow last month when the Government increased the rate by less than expected, causing Hastings to take a one-off charge of £8.4 million for 2019. After factoring in Ogden, the loss ratio at Hastings was 81.1%.

Analysts at UBS said the higher expenses in today's results were one factor behind the 43% fall in underlying profits to £59.7 million coming in 6% short of the market's consensus forecast.

However, they praised the company's improved customer retention as the number of policies on Hastings' books increased by 4% in the half year to 2.81 million. This boosted market share to 7.8% from 7.5%, despite a period of disciplined underwriting.

Market premiums have been under pressure since the second half of 2017, but Hastings noted early signs of rate increases in the second quarter of 2019. It has a target of three million customers this year but says it won't chase this figure at the expense of profitability.

How the pricing cycle evolves over the rest of the year will have a big bearing on the dividend pay-out ratio, which UBS estimates could be 85% and well above the company's target for 65-75% of adjusted profits in 2019. Today's interim dividend was left unchanged at 4.5p, based on the company's strong capital position and cash generation of £99 million.

According to UBS, Hastings trades with a dividend yield of 6.3% this year and rising to 7.4% in 2020. Shares have slid from more than 300p in late 2017 to 176.7p, with the stock 7% cheaper after today's results.

Analysts at Numis Securities believe the stock is worth 220p, adding that there appeared to be no major surprises in today's results. They said:

"We expect the shares to remain subdued until there is evidence margins are improving. On the plus side, it is notable that Hastings has sufficient confidence in its business to continue customer growth."

Hastings said its outlook and guidance for 2019 was unchanged, with the company reporting progress on a number of initiatives to improve its operational performance. These include efforts to bolster digital adoption and the launch of an anti-fraud platform, which has already identified some new types of fraud.