esure Group (LSE: ESUR) announced an 18% cut to its interim dividend today. Shares in the insurer fell to as low as 235.1 pence during morning trading, 11.5% lower than Friday’s close.
esure’s interim dividend will be just 4.2p per share, down from the 5.1p paid in the same period last year. Increasing claim costs and more personal injury claims caused underwriting profitability for its motor business to fall 81% to £3.3 million in the first half of 2015. Underlying earnings per share fell 20% to 9.0 pence in the half year.
Although motor insurers continue to face steep claims inflation, competitive pressures are easing in the industry. Premiums have started to rise since the start of 2015, after three years of declines. The increase in premiums also looks sustainable, and esure plans to implement further rate increases to combat the rising cost of claims.
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However, raising premium rates too sharply may lead esure to lose its customers to its competitors. But, as its competitors are raising rates themselves and capacity is being withdrawn from the market, the loss of some customers should be manageable and benefit its bottom line.
The interim dividend comprises a 3.0 pence per share base dividend and a further special dividend of 1.2 pence per share. This compares to last year’s 3.6 pence per share base dividend, which came with a special dividend of 1.5 pence per share. The reduction in the base dividend is particularly concerning, as a cut to just its special dividend would have been sufficient to reduce its interim dividend to 4.2 pence per share. Instead, it is likely an indication that management expects earnings will likely remain weaker in the longer term.
Earnings have been more resilient at two of its largest competitors, Direct Line Group (LSE: DLG) and Admiral Group (LSE: ADM). Both insurers have seemed to sacrificed customer growth in order to preserve their profitability more.
Direct Line Group saw the number of its in-force policies fall 1.6% in the first half of 2015, whilst esure let its policy numbers grow 2.5% over the same period. And in stark contrast to esure, Direct Line’s underlying EPS rose 48% to 16.7 pence.
Admiral Group, which has yet to announce its interim results, saw its customer base fall 8.6% in 2014. Although Admiral Group is set to see earnings decline by around 10% in 2015, the insurer has a strong competitive advantage over its competitors.
Admiral’s industry leading combined ratios of 78.5% for its UK car insurance business compares favourably to the over 95% ratios enjoyed by esure and Direct Line. Its wide profitability margin means it can weather higher rising claims inflation more easily than its competitors. But, unfortunately, its valuation is significantly more expensive than the other insurers.
Admiral’s shares trade at a forward P/E of 15.5, compared to esure’s 13.9 and Direct Line’s 13.3. Including the impact of special dividends, Admiral and Direct Line have a 2015 forward dividend yield of 6.1% and 12.4%. If we assume esure will cut its final dividend by 18% as well, shares in esure would have the lowest prospective dividend yield, at 5.8%.
Direct Line seems to be the best insurer on growth, dividends and valuations. The insurer is still seeing strong growth in profitability, yet it is also the cheapest on earnings and dividend yield.
