Well, that didn’t last long. Insurer Esure (LSE:ESUR) bought the remaining 50% stake in price comparison site Gocompare.com (LSE: GOCO) just under two years ago, only to announce this June that it was considering a demerger. It duly delivered this morning. Now investors have a choice of two insurance businesses, so which is best placed to drive your portfolio forwards?
Double drop
Peter Wood, Esure’s chairman, says the split will free up both businesses to focus on their distinct strategies, with Gocompare.com operating as a leading UK price and product comparison website and esure Group as a leading UK provider of motor and home insurance.
Both businesses saw their share prices drop sharply in the wake of the news. FTSE 250 listed Esure is down almost 25% to 199.5p, which reflects the loss of GoCompare’s value and prospects. This sounds shocking but is broadly in line with analysts’ predictions. GoCompare has also fallen, by the lesser sum of around 5%, which hardly suggests investors are bursting with enthusiasm.
Oh GoCompare
Existing investors in Esure will receive one new GoCompare share for each Esure one they previously held. These are two different businesses so you may want to offload one, depending on factors such as your attitude to risk.
TV’s Gio Compario may not tickle everybody’s funny bone but serious investors can’t afford to ignore him. Every time he hits our TV screens in a new advertising campaign, site visits accelerate. In August, Esure reported a 22.3% rise in Gocompare’s revenue from £59.6m to £72.9m, with operating profits up 9% from £13.3m to £14.5m.
Comparison sites are big business, attracting a host of competitors including Moneysupermarket.com, Comparethemarket.com, and uSwitch.com. The market isn’t yet saturated, with new entrants still trying their luck. This has led Hargreaves Lansdown to describe GoCompare as “a high growth tech stock looking to expand into new markets,” in contrast to the far more stolid Esure.
Two for one
GoCompare has a good tune to sing but it could struggle to expand beyond motor and home insurance into other sectors such as home energy and travel insurance. Utility switching is a crowded sector while price-focused travellers have driven premiums to ever lower levels. As Hargreaves Lansdown points out, revenue per interaction has fallen from £4.78 in 2013 to just £4.30 so far this year.
As a traditional motor and home insurer, Esure works to a far more established model. However, motor insurance is a tough and mature market, with companies typically paying out as much in claims as they generate in premiums. Two recent hikes in insurance premium tax, taking it from 6.5% to 10%, haven’t helped.
Roadworthy vehicle
Esure is a proven brand but not particularly exciting. Even its female-friendly spin-off Sheilas’ Wheels isn’t as racy as it was, although it did well to survive EU rules banning insurance companies from setting premiums according to gender.
The two new entities have distinct attractions for investors. With GoCompare, the draw is growth, while dividends may not hit the high notes for some time. Esure’s may remain in the growth slow lane but it currently yields a steady 4.12% income, with management aiming to pay out 50% of underlying group profit after tax, plus special dividends where capital allows. Both stocks could motor in future, but at different speeds.