Esure Group 6.75% Sub Nts 19/12/2024

New as a contributor! Wondered if anyone had views on the above. It's a high £100K minimum investment; the yield to maturity is 5.6% and running yield is 6.323%. Is there anything about the terms one needs to be aware of? It seems to be stable enough.

Thanks

Comments

  • Michael C

    Welcome !!

    Just to say, don't be surprised if there are few responses to this as I think £100k in one company is beyond the limit of most people that contribute to this forum, and therefore few will have researched it


    Having said that, now I'll be proved wrong .......hopefully !


    Woz
  • Prospectus here http://www.esuregroup.com/~/media/Files/E/Esure-V2/debt-investors-pdf/debt-investor.pdf

    I haven't looked at any recent statements but it seems they run at the more conservative end of the motor insurance spectrum, and sell home insurance too. Please bear in mind I haven't put much thought into this so I am not recommending anything here!

    P&C insurers can go bust if they can't pay out claims from collected premiums or trading profits. On page 84 they mention their investment bond portfolio is on average A rated with a 1 year duration, which is low risk. Esure were described in the prospectus as cautious and backed off growing the motor insurance division during 2008-9 when claims were higher than average.

    page 88 shows the bond is a holding company issuance, meaning it is structurally subordinated: the subsidiary companies' debtors get paid off before you will in the event of default. Your coupons are paid from holding company profits, which come from operating company dividends. The bond itself is a subordinated security. I don't see any negative pledge, meaning they could easily issue a load of senior debt and you couldn't do anything about it.

    page 89 has some interesting information on the motor insurance market, perhaps you should investigate the growth of the UK car market, as insurance is mandatory in the UK this will guide you to their revenue growth.

    Peter Wood, Chairman, founded Direct Line in 1985 and esure in 2000. He managed to run it through the recession, and took it public in 2013. Esure bought and subsequently sold gocompare a few years later, so that suggests the company is looking to take advantage of profitable opportunities, but this behaviour could reduce stability of earnings. This article highlights how the recently spun-off gocompare had significant profit growth after the demerger... also note that Peter Wood is Chairman of both companies.

    http://www.telegraph.co.uk/business/2017/01/10/gocomparecom-hails-double-digit-growth-esure-split/

    This article (below) has a nice chart of esure's share price, the fall in November is due to the demerger of gocompare, but note how the share price has already recovered to that level. This has to have come either from an increase in earnings or a rerating of the stock. Either is positive.

    http://www.telegraph.co.uk/business/2016/09/13/esure-to-float-gocompare-in-demerger/

    The bond is institutional in trading size, but is only £125m in size. This is a strange combination which may cause it to be illiquid. I don't know, I haven't tried to buy it.

    The bond is subordinated, unrated, and the yield to maturity suggests a high yield rating if it were to be rated. If things go wrong at esure, the structure of the bond means you are relatively low in the capital structure and the market price should reflect any uncertainty over the health of the business.

    Sorry, I haven't bothered to structure this note in any way, I have just jotted down my thoughts.

  • Large minimum, illiquid due to small size and unrated. Would probably be BB if rated. However, yields more than most ORB bonds of similar or worse credit quality.
  • I am very grateful to all your comments, in particular the detailed research done by burberryjam. From what I hear the bond is quite illiquid, but it is quite shortdated. Share price is good. Thanks again.
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