Market-watchers have been looking for an upturn in car insurance for several years now. Finally there is evidence, from Direct Line and from various surveys in the sector, that this inflection point may have been reached.
The problem has been that claims inflation, the amount that motorists put in for, has been rising faster than the rate at which insurers can lift premiums. Most assume that inflation is caused by fraudulent neck whiplash injury claims (that problem has not gone away and, indeed, there are signs that it is returning again), but cars are getting more expensive and complicated, garage costs are rising and the lower pound will push up the prices of imported components.
In the first nine months of the year, Direct Line, which gets half its business from motorists, pushed up premiums by 10 per cent. The company believes that inflation is running at the top end of its long-term forecast of 3 per cent to 5 per cent, which worries some analysts. Its customers appear to be claiming less frequently, while the number of motor policies grew by 4 per cent.
The home insurance side is more competitive, the cost of policies raised by only 0.6 per cent, below the rate of inflation. Direct Line was confident enough to say that its combined operating ratio, the balance between money in from premiums and investments and claims paid, where any reading below 100 per cent demonstrates profitability, would be at the lower end of its 93 per cent to 95 per cent target range, a very positive outcome.
The story since the 2012 float has of costs being cut from the business, more than £200 million so far. This is flattening off and the insurer had to absorb £24 million put into the government’s levy to subsidise those living in flood-prone areas, but there is more to come.
Direct Line, like other British insurers, was given an easy passage in the Solvency II tests this year, having plenty of excess regulatory capital. The problem for investors is that future dividends are uncertain because much of these come in the form of special payments. Still, all else being equal, the shares, up 3¼p at 353¼p, probably offer a forward yield of 7.5 per cent, a good reason to hold them.
My advice Buy
Why The motor market appears to have returned to equilibrium, regulatory capital requirements are low and dividend yield is attractive
BBA Aviation
BBA Aviation is in such a state of transition that it is hard to draw any conclusions from its past. The company will be out of commercial aviation, servicing holiday flights at the likes of Heathrow, shortly. The purchase of Landmark in February doubles the size of the bigger business, serving private jets from about 200 locations, to more than 90 per cent of the group.
The rest includes an offshoot that services those jets, which was seen as an underperformer in the past but is showing signs of slowing the rate of decline, and a business providing old parts for commercial and military aircraft. This was the subject of a $61.5 million infill acquisition yesterday.
The question is the extent to which that private jets business can beat market trends by growing share. The nine-month figures suggest that it continues to do so. In addition BBA is cash-generative, which will fund further deals or eventually go back to shareholders. The shares have been strong on the back of the lower pound and, up ¼p at 247¼p, sell on a fairly high multiple of 13 times’ next year’s earnings, but they look good value in the long term.
My advice Buy
Why Cash is piling up and long-term trends are good
Aveva
Theoretically, Schneider Electric, of France, which has made two efforts to take over Aveva, could return again some time next month, under the City takeover code. This isn’t going to happen, which is good for the engineering software producer’s bottom line, at least. The first attempt cost about £10 million in fees. The shares have held up pretty well since the last, brief talks foundered in the summer, helped by a boost from the lower pound.
Aveva, therefore, will have to soldier on as it is, progress limited by its dependence on oil and gas and shipbuilding. It is raising sales of its 3D products, which are useful when customers have to redesign existing plant, and is building relationships with owner-operators such as the national oil companies, rather than going through the big engineering contractors.
There is also a tight control on costs. The shares were off 4p at £17.75 after halfway figures that showed revenues down by 6 per cent before currency effects and pre-tax profits off a touch at £9.1 million. Just before the first talks with Schneider broke down, they were trading above £23. The cash is piling up, £124 million at the half-year-end, and while the dividend is being increased gradually this is not going to be whittled away fast.
Instead, Aveva will spend it on an acquisition, should the ideal niche software suite come along, or, at a much later date, hand it back to investors. The shares sell on 27 times’ earnings. Until those core markets come back, it is hard to see any immediate progress.
My advice Avoid
Why The shares look highly rated for now
And finally . . .
Student accommodation has been among the strongest performers within the property sector because there is a chronic under-supply while numbers of students are growing. The annual meeting statement yesterday of Unite Group, the biggest provider, was positive enough. With this year’s freshers settled in, occupancy is at 98 per cent, about as high as it can be, with average rental growth running at 3.8 per cent. Bookings for the next year are ahead and Unite is even looking at the London market again.
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