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Hastings Direct shares are hovering close to a magic number. That number is 300. Shares in the FTSE 250 insurance company spent yesterday hovering just north of 300, but look at the longer term chart and it looks like Hastings Direct could be about to head south for the spring.

This time last year Hastings Direct shares were changing hands for around 224-225. Since then the company has seen some decent growth in value, breaking 300 in April and staying north of that ever since. However, things may be about to change. Someone out there is buying Hastings Direct shares whenever they get close to 300, but there also looks to be some selling pressure.

Whoever is buying Hastings Direct will not be keeping that price about 300 forever. But let’s look at the fundamentals.

Hastings Direct shares – is the market falling out of love?

First off, insurance firms now have to keep more capital and liquidity on their balance sheets as a result of the Solvency II directive instituted by the EU in 2016. This means less money being paid out in dividends. Those who hope that UK insurers may somehow benefit when (or if) the UK leaves the EU are likely to be sadly disappointed, as big UK insurance companies will want to continue to do business in Europe.

Inflation will also be a concern for investors in Hastings Direct. The company is not involved in the life insurance business, and as an investor in the insurance sector, you are really looking at two sub-sectors – the life specialists like Aviva and Legal & General, and the non-like players like Direct Line, Admiral, and yes, Hastings. Higher inflation in the UK – which is not a certainty – will hit the direct insurers, creating a negative effect on demand and leading many policyholders to cancel their policies.

General insurers like Hastings Direct have been loved by investors because they pay special dividends. These are non-scheduled dividends which will reward existing shareholders. Solid profits from Hastings in 2016 have encouraged the belief that there may be more in the offing. But 2018 is going to be a tougher year for direct insurers to make profits if inflation trends higher.

Management changes – will Tony van der Meer have what it takes?

On top of this there has been a change in senior management. Chairman Mike Farey is retiring in May, and CEO Gary Hoffman is going to become non-executive chairman. The new chairman will by Tony van der Meer, who is currently managing director of Hastings’ UK trading subsidiary.

Hastings is in the business of selling insurance, and lots of it. A great deal hinges on Van der Meer’s ability to do this in the future. He does not come from an insurance background however, having previously worked at and egg, all wonderful brands that prefer to avoid capital letters, but not insurance companies. Still, his experience in selling digital products demonstrates that Hastings is rightly placing emphasis on digital channels for the sale of insurance products going forward.

Hastings Direct had a pre-tax operating profit of £94 million for 2016, substantially higher than 2015, but all this growth has been accounted for already as far as investors are concerned. The brokers are feeling less bullish, and seem to be broadly in agreement with The Armchair Trader. JP Morgan Cazenove downgraded Hastings Direct shares to neutral from overweight this month. Two brokers advocate selling Hastings now, and four more have it at neutral.

Looking at the share price trading activity today, there is a large buyer acquiring Hastings at 300 on the mark, but they can’t keep buying forever. Eventually, we fear, this one will start trending south as the fundamentals affecting direct insurance begin to tell.

Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

Stuart Fieldhouse

Stuart Fieldhouse

Stuart Fieldhouse has spent 25 years in journalism and marketing, including as a wealth management editor for the Financial Times group, covering capital markets and international private banking, and as an investment banking correspondent for Euromoney in Hong Kong. He was the founder editor of The Hedge Fund Journal.

Stuart has worked at CMC Markets, supporting the re-launch of its global financial spread betting and CFD trading platforms. He is also the author of two books on trading, published by Financial Times Pearson. Based in The Armchair Trader’s London office, Stuart continues to advise fund managers, private banks, family offices and other financial institutions.

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