29th Sep 2022 12:32
(Alliance News) - Share price slides for motor insurers following the UK mini-budget were overdone, German bank Berenberg said on Thursday, believing rising interest rates to be beneficial to the sector.
Shares in Admiral Group PLC, Sabre Insurance Group PLC and Direct Line Insurance Group PLC have all suffered, as traders fear the motor insurance sector will be hit by rampant inflation.
Admiral shares are down 6.2% over the past week, despite rising 0.8% on Thursday afternoon to 1,942.00 pence. Sabre shares were up 0.9% at 99.40 on Thursday afternoon, but have fallen around 2% over the past seven days. Direct Line was up 2.8% to 182.60p on Thursday afternoon, but is down roughly 8% since the end of last week.
However, Berenberg believes things are rosier for the sub-sector. It noted that rising interest rates are a "significant positive".
"UK motor insurers have again been a source of underperformance following concerns about the macroeconomic environment. The view of investors is that the Conservative Party's 'mini budget' is fuelling inflation in the UK, and that UK motor insurance is a sub-sector perceived to be exposed to higher inflation. In our view, the share price reactions of Admiral, Direct Line and Sabre Insurance since last Friday are applying a blanket negative view to all three companies, rather than the reality, which is much more nuanced and balanced," Berenberg explained.
UK Chancellor Kwasi Kwarteng announced a series of tax cuts and spending plans in a 'fiscal event' on Friday. Kwarteng abolished the top rate of income tax for the highest earners, as he spent tens of billions of pounds to drive up growth amid a cost-of-living crisis.
From April, the 629,000 people on more than GBP150,000 a year will no longer pay the top income tax rate of 45% and will instead pay the 40% applicable to those on over GBP50,271. Kwarteng also brought forward the planned cut to the basic rate of income tax to 19p in the pound a year early to April.
He also confirmed that a 1.25 percentage point national insurance hike, announced by the previous Tory government, has been cancelled. A hike in corporation tax, which would have taken the levy to 25% next year, has also been reversed. It stays at 19%.
In the short-term, cuts to corporation tax would be good news for Direct Line, Admiral and Sabre. Berenberg noted part of the market's fear was in the medium- and long-term, however.
"Investors view the aforementioned policies as inflationary. This is a concern for underwriting margins and has been the single biggest driver of the negative share price reaction. The sector is currently viewed as a one that is susceptible to inflation," Berenberg added.
Investors were further spooked after a profit warning from Saga PLC this week.
Saga on Tuesday lowered guidance for underlying pretax profit to a range of GBP20 million to GBP30 million from a previous range of GBP35 million and GBP50 million. In its first half ended July 31, Saga booked a GBP269.0 million impairment of insurance goodwill. The hit is due to a weaker outlook for future motor and home margins.
Saga provides insurance, cruises and package holidays to people over 50.
Higher inflation would mean more Bank of England rate hikes, which would be good for insurers, Berenberg added.
The market expects bank rate to reach 6.00% by the end of next year, from 2.25% currently.
"Insurers are beneficiaries of rising interest rates in three ways. First, they benefit from higher investment income; this is material as every 0.5 percentage point increase in yield raises [earnings per share] by around 5% for Direct Line, 4% for Sabre and 3% for Admiral," Berenberg explained.
"Second, for every 100 basis point rise in interest rate, solvency rises by 2 percentage points for Admiral and Direct Line."
Admiral is Berenberg's top pick in the insurance sector, though it is "cautious" on Sabre. In addition, it does not expect a dividend cut from Direct Line.
By Eric Cunha; [email protected]
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