RBC lowers target price on Hastings amid 'challenging' market conditions

Analysts at RBC Capital Markets lowered their target price on British insurance outfit Hastings Group from 225p to 200p on Monday, reflecting lower estimates for 2020.

RBC, which kept its 'sector perform' rating on the stock unchanged, reduced its earnings estimate on Hastings by 10% for 2019-21E as a result of a two percentage point increase to its loss ratio assumptions for the insurer.

The Canadian bank also slightly reduced its profit commission estimates and increased its assumed expenses to reflect a change in UK law restricting VAT recoveries and increases in underwriting levies.

The analysts said Hastings had been "one of the faster-growing motor insurance companies in the UK in the last four years" despite operating within a "challenging market".

But with premium growth now reducing from 21% in 2017 to 6% in FY19-20E, with a worse outlook for 2019, RBC felt Hastings was unlikely to meet its ambition of increasing its number of live customer policies from 2.7m to 3m during 2019 and now expected this to be achieved during 2021.

RBC also highlighted that Hastings expected to see expense improvements following the implementation of its new underwriting system, Guidewire, something it thinks will actually result in higher expense ratios for 2018-19, driven by higher amortisation.

"We value Hastings using a price to earnings multiple of 10.5x applied to our 2020E IFRS earnings. The P/E multiple is broadly in line with the UK motor sector exc Admiral. Our price target of 200p supports our Sector Perform rating," concluded RBC.