Esure growing confident as rates starting to rise

The payout was short of the consensus forecast for 12.9p and came as underlying profit before tax fell 22.7% in what was a highly competitive market, though signs of improvement in motor insurance rates have emerged.

Underlying earnings per share declined 20% to 16.4p.

Having taking full ownership of the Gocompare.com price comparison website in March last year, income at the division has risen 5.0% to £119.0m in the calendar year but profit before tax declined 9.0% to £23.3m as a result of investments in the brand that saw income growth of 10% in the second half.

In the motor insurance market, "positive signs" of rates improving later in the year, followed a tough claims environment, though Esure is encouraged by the government's announcement that it will end the right to cash compensation for minor whiplash injuries and raise the upper limit for the small claims court.

Less encouraging is the home insurance market, where pressure remains on pricing from the highly competitive market, with profitability squeezed by the storms in the north of England towards the end of the year, leading to around £4m of claims costs. But premium and customer numbers were maintained during the year.

Esure's dividend was less than investors might have hoped as directors said they were retaining capital to fund "profitable growth", with the Solvency II coverage ratio at 123% post-dividend and solo coverage at 138%.

Looking forward, chief executive Stuart Vann said the group was well placed to benefit from better market conditions in the future as rates begin to rise, though discipline was important in home insurance.

"We are in a strong position to deliver on our strategic objective of growing our insurance business and to take advantage of the opportunities presented through an improving Motor market.

"2016 has got off to a good start and we expect to deliver gross written premium growth of 10-15% and policy growth of 4-6%, assuming stable market conditions."

Esure expects its combined operating ratio in Motor and Home to be in the region of 97-98%, with Gocompare.com predicted to achieve an increase in profitability of 20-30% in the current year, with a group increase of 10% to 15% premium growth in 2016.

Analysts at Shore Capital said the dividend was some way from its 13.1p forecast. "Although the group suggests that it has decided to retain capital to fund 'profitable growth', the Solvency II coverage ratio of 123% post dividend implies that it didn’t really have much room for manoeuvre."

In addition, after management's indication that the combined ratio for 2016 is likely to be in the 97% to 98% range, ShoreCap has downgraded its 2016 forecast earnings by circa 9% to 18.5p and 2017 by 5% to 20.1p.

"Assuming a continuation of the 70% pay-out ratio would then imply dividends of circa 13p and 14p respectively."