18th Jul 2022 10:04
(Alliance News) - Motor insurance providers in the UK are being hit by accelerating claims inflation, Jefferies warned on Monday, and margins are suffering as a result.
The bearish note from Jefferies follows a profit warning from Sabre Insurance PLC. Larger peer Direct Line Insurance Group PLC on Monday also warned on its annual outturn.
Direct Line shares were 13% lower at 188.45 pence, the worst mid-cap performer. Admiral Group PLC fell 5.7% to 1,774.76p. Save for a sharp share price slide for a sleeker GSK PLC, following the listing of consumer health arm Haleon, Admiral was the worst large cap performer in London.
Sabre was down 5.0% at 102.59p, after falling 40% in one day alone last week following its profit warning.
"Following Sabre's profit warning, it is clear that claims inflation is accelerating at a pace that UK motor insurers cannot keep up with. Even with prices rising, we expect margins to deteriorate significantly," Jefferies warned.
Jefferies lowered its recommendation for Direct Line to 'hold' from 'buy'. It cut Admiral to 'underperform' from 'hold'.
The investment bank expects Direct Line to cut its annual dividend. It also predicts Admiral's commissions, which are generated from co-insurance operations, to suffer.
"Given the rising claims costs, we expect Admiral to report a current year loss ratio of 94% in 2022. The 2022 underwriting year combined ratio reported by Admiral at half-year will be particularly important in our view, and is likely to disappoint. Not only does this impact current year earnings, but it also determines the future profit commissions generated from Admiral's co-insurance and reinsurance arrangements," Jefferies said.
"Our main observation is that Admiral does not receive commissions until a 97% combined ratio is achieved, which we do not expect to happen until 2026 at the earliest for the 2022 underwriting year."
For Direct Line, Jefferies cut its earnings per share estimate for 2022 by 4.6%, by 7.2% for 2023 and by 3.6% for 2024.
It has also reduced its dividend estimate by 36%.
"Whilst we believe that Direct Line Group's motor repair network does offer a competitive advantage in terms of controlling rising claims costs - the insurer is still not immune to the rapid acceleration in inflation that we have experienced so far in 2022," Jefferies commented.
Direct Line itself on Monday warned of "heightened volatility across the UK motor insurance market".
"We have seen claims inflation in motor in the first half of 2022 spike above the levels assumed in our pricing. As a result, we are revising our combined operating ratio target range for 2022 to 96% to 98%," Chief Executive Officer Penny James commented.
Direct Line had previously targeted a combined operating ratio range of 93% to 95%. A ratio below 100% indicates an insurer is making underwriting profit. A ratio of 98% would be only barely profitable.
In addition, the company said it will not proceed with a second GBP50 million tranche of a GBP100 million buyback. It expects an unchanged interim payout of 7.6p.
By Eric Cunha; [email protected]
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