With October's successful flotation of motor insurer Direct Line (DLG) still fresh in investors' memories, esure' s planned IPO later this month - which includes an allocation for retail investors - is eagerly awaited. But the indicative price range doesn't suggest much scope for share price upside, while the group will face plenty of trading headwinds going forward.
True, as motor insurers go - and esure does earn 71 per cent of its premiums from motor business - the group doesn't look in bad shape. Its 2012 full-year figures revealed a solidly profitable combined ratio (of claims to premiums) of 92.8 per cent - better than rival Admiral's (ADM) 95.2 per cent ratio and rather more attractive than Direct Line's barely profitable ratio of 99.2 per cent. The group's investment return reached a decent 5.2 per cent, too - not at all bad for a portfolio which is 96 per cent invested in cash and bonds.
But esure's motor market is under pressure - on average, UK motor rates slumped 12.7 per cent during 2012. What's more, the motor market is facing significant regulatory challenges. Back in September, the Office of Fair Trading referred the sector to the Competition Commission after concluding that "competition appears not to be working effectively in the private motor insurance market". That probe could take up to two years and may result in further premium rate pressure. Moreover, reflecting European Union law, gender-neutral insurance pricing became mandatory in December - a potential threat for esure given that 95 per cent of its Sheilas' Wheels customers are female. "They're operating in a sector that's not particularly appealing," says analyst Hari Sivakumaran of broker Oriel Securities.
Given that backdrop, the proposed pricing of the IPO has faced significant scrutiny. Specifically, 35-50 per cent of esure will be offered for an indicative price range of between 240p and 310p - on a mid-point basis, this suggests a market value of around £1bn. Oriel Securities estimates that such a valuation would imply a share price rating of about 12 times - not substantially out of line with Direct Line's 11 times multiple and Admiral's 13-14 times rating. On that basis, Mr Sivakumaran believes the proposed valuation range "is not too unreasonable". But, given the tough trading outlook, it doesn't suggest scope for significant upside, either.
