Last Saturday, my annual car insurance bill from Norwich Union dropped through the post. In line with the fanfare in August that Norwich Union would increase its premiums by 16%, it was no surprise that the cost had risen by 10%. Although enough to give drivers road rage, this must be sweet music to the ears of shareholders, who have been pounded by price wars over the past three years. It had been widely acknowledged that overall profit levels across the industry were not sustainable, and hence any reversal of this trend is encouraging news. If you’re thinking of buying into insurance, here’s a share to take a punt on:
Gamble of the week: Highway Insurance (AIM: HWY, 62p)
However, the million dollar question is: will these price hikes stick, and does this represent the bottom of the cycle? In my opinion, with Royal Bank of Scotland, the industry leader, following Norwich Union’s lead, then I believe that the outlook is far more favourable.
Hence my interest in Highway Insurance (HWY), which is one of the UK’s leading motor insurers. The company employs more than 400 people and writes the majority of its policies
via intermediaries.
At the company’s interim results in August, the first half numbers were weak. Gross premiums fell by 9% to £119m, as management deliberately avoided loss-making business. Profit before tax dropped from £11.3m to £7.5m with the combined ratio (claims to premiums) deteriorating by 1.2%
to 98%. To top it all, investment income also fell largely due to higher interest rates. Nevertheless, I think this could be the turning point.
The Board stated that “barring unforeseen circumstances, it expects to at least maintain the full year dividend at 5.3p per share”. The executive chairman added: “Whilst conditions in the motor insurance markets remain challenging, Highway is well positioned to take advantage of an upturn in the markets when this emerges.”
In terms of valuation, the shares are not expensive. At 60p, they trade on 1.4 times book, a 2007 p/e ratio of 10 and offer a hefty dividend yield of nearly 9%. Along with improving conditions, I believe this is a good time to pick up some shares, as part of a diversified portfolio.
Over the past six months, seven directors have purchased stock at prices ranging from 60p to 83p.
Recommendation: Good value – follow the directors and BUY at 62p (market cap £126m)
Paul Hill’s tip of the week: To find out what you should consider when investing in supermarket stocks and Paul Hill’s recommendations, see: Leave expensive supermarkets on the shelf. Or click here for a full list of share tips.