Citi downgrades Esure as it sees little scope for outperformance

Citi downgraded Esure to ‘neutral’ on Tuesday, saying it sees little scope for outperformance in the insurer’s 2017 guidance.

The broker downgraded the FTSE 250 company from ‘buy’ but hiked its target price to £2.35 from £2.25, as although it is confident in Esure’s growth outlook it said it sees little room for outperformance, and that further earnings per share upgrades were unlikely.

Esure is targeting growth between 15% and 20% for this year, and Citi believes that while the lower bound is achievable, it will be a stretch to exceed the upper end of the range.

It forecasts premium growth of -16.5% driven by favourable motor pricing, new business growth from its websites and the expansion of its product footprint.

Citi also expects that that its combined ratio could face some pressure in the future. It forecast a combined ratio of 97.3% for 2017, which is line with Esure’s guidance of 95% to 98% and marginally above the consensus.

It expects weak top-line development in the home division; higher acquisition costs due to the high volume of new business growth; potentially higher reinsurance costs at 1 July renewal, and likely lower reserve releases going forward.

But Citi said it does think that the higher Solvency II base will give capital flexibility as Esure’s 201616 Solvency II ratio of 149% was at the upper end of the targeted range between 130% to 150%.

“As a result, we believe that the group can both maintain business growth and offer attractive dividends”, Citi said.

Shares in Esure were down 1.12% to 237.30p at 0907 GMT.