Insurers
Amazon’s next big disruption could be to the insurance market but it has not worried investors in traditional insurers — yet (Tabby Kinder writes). This is because the UK’s insurance sector has already been resoundingly disrupted. More than 66 per cent of motor insurance is distributed through price comparison websites, up from just 20 per cent a few years ago, while almost 60 per cent of home insurance is sold through websites such as Gocompare and Comparethemarket.
The surge has forced leading players such as Legal & General, Aviva and Prudential to be more transparent on pricing and become more efficient. Analysts agree that the disruption has been manageable and the opportunities have outweighed the risks because larger groups have been forced to use technology to trim the fat. Look, for example, at Stephen Hester’s performance since taking over RSA Group, aiming to drive out £180 million in costs and putting the share price on an upward trend.
The real threat will be if Amazon uses its proposed comparison site as a jump to a wider play in which it underwrites insurance products. Underwriting has experienced little disruption because getting into the market is expensive and requires skilled staff and capital. Not short of funds, Amazon’s cutting-edge technology and loyal customers, to whom it sells products ranging from gadgets to food, could be a serious threat for established underwriting players and their comparably old-fashioned IT systems.
Analysts think that such a move is a possibility but, until its underwriting plans or lack thereof are clearer, a new price comparison website backed by the ecommerce giant could be a small but positive influence on British insurers. Not to mention the consumer, who will benefit from the pressure on prices.
Investors would do well to ignore the Amazon sideshow for now and focus more on pricing, particularly on predictions for motor premiums, and a solid set of half-year results.
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Share price performance in the general insurance sector is tightly correlated to the cost of insuring a car, and the average car insurance premium has fallen this year at its fastest annual rate since 2014. Car insurance prices rose steadily over the past three years but insurers have started to factor in the benefits of legislation designed to cut the cost of personal injury claims. This means that share price performance has been weak despite little change in earnings. Hastings’s share price has fallen 12 per cent in the past six months, Direct Line was down 13 per cent, and Esure was down more than 7 per cent until it announced a takeover by Bain Capital this week.
The insurers’ interim results have brought some stability to the pricing outlook. Admiral Group suggested on Wednesday that rates would not go off a cliff and that the growing proportion of motor policies underwritten by quoted insurers could increase the price discipline. In the general sector, the beast from the east and hurricanes in America led to a spike in the number of claims and took some money out of the system, but not enough to worry analysts. Among the life insurers, groups such as Prudential and Aviva were throwing off cash in the form of dividends or share buybacks as policies matured, although analysts have questioned whether they can continue to grow with less traditional and new business.
With share prices and market valuations low but few buying signals in the short-term, the outlook is neutral to cautiously optimistic, whatever Amazon decides to do.
OUTLOOK Neutral
WHY Financial results are mixed because of the weather but underlying trends are solid and the outlook for motor premiums is better than expected
Marshalls
Like train cancellations during a cold snap or rain during a Test match, dubious complaints about the impact of adverse weather conditions have become a regular part of corporate results (Callum Jones writes). The concern expressed by Marshalls, Britain’s largest provider of paving and landscaping products, was perhaps more justified than that of its peers. Who would contemplate garden renovations or new driveways while the beast from the east was sweeping in?
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Shares in the FTSE 250 company had been drifting since May, when it told investors that bad weather had knocked about £9 million off its sales and shut its factories for several days. However, they surged 14.4 per cent to 483½p yesterday when Marshalls revealed that revenues and profits had overcome the winter freeze and risen 12 per cent in the first half.
The Yorkshire-based company manufactures natural stone and concrete landscaping for domestic and commercial customers. Projects have included the flooring at One New Change, near St Paul’s Cathedral in London.
While the Construction Products Association has predicted a 0.6 per cent decrease in market volumes this year, Marshalls said that indications in key markets such as new-build housing, road, rail and water management were “supportive”.
It said it was continuing to perform ahead of CPA projections, “despite ongoing macroeconomic uncertainty”, having previously warned that lower activity in the wake of Brexit could reduce sales and production volumes.
Group revenues rose from £219.1 million to £244.3 million in the six months to the end of June, lifting pre-tax profits from £29.1 million to £32.5 million. Buoyed by the acquisition of CPM, which offers specialist services to water companies, for £38 million last year, it was eyeing up takeovers in building materials, minerals and protective street furniture. With the snow a distant memory, Marshalls spoke of “very strong” trading during the recent hot weather. Its revenues were up 21 per cent in June and July.
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How many other companies who bemoaned the bleak midwinter will report soaring summer sales?
ADVICE Buy
WHY Strong commercial and public sector demand is helping the sun to shine