Hastings Group (LON:HSTG) is a UK based general insurer, mainly focused on the motor market. Here I am going to set out how the business is organised, its background, competitive advantages and why I hold a long position in it.

Structure

Hastings has two division: retail and underwriting. The retail business acquires customers for the group and manages relationships with them. That would include offering a price for new policies and handling claims. Hastings distributes almost entirely through price comparison websites ("PCWs") - about which more later. The underwriting business prices policies and bears the financial risk associated with them, also entering into reinsurance contracts. The way the divisions work together is underwriting will give retail a price for an individual policy, retail will then add on to that price what it expects to pay for marketing, its own overheads and profit margin to give the customer a retail price on that policy.

The key financial statistic for assessing a general insurer is the "combined ratio". This is underwriting costs as a percentage of premiums received. General insurers also make money from managing their investments (the premiums they receive upfront), interest income on premiums which are paid by instalment and selling add on products such as 3rd party breakdown cover. But the combined ratio is the key measure of the health of an insurer. A consistent combined ratio shows that a company is well managed and understands the risks it is taking. Hastings is remarkably consistent, coming in between 87-91% since 2012 (last 3 years shown below): 


  2015 2016 2017
Group calendar year loss ratio 75% 77.7% 73%
Acquisition expense ratio 9.1% 7.6% 8.2%
Other expense ratio 6.9% 6.0% 5.8%
Group combined operating ratio 91.0% 91.3% 87.0%
Source: company accounts, results presentations and own calculations


Background and competitive advantage

Understanding Hastings Group (LON:HSTG) background is crucial to understanding its competitive advantage. It was established as a broker in 1997 and began underwriting in 2002. The directors saw early how online was going to shake up the insurance market and so set the systems to distribute via price comparison websites. In fact the current CEO was previously MD of moneysupermarket. What this means is hastings has the systems and the savvy to distribute online. While some insurers see PCW's as a threat to be…

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