Motor insurance prices 'likely to stay flat', Deutsche upgrades Admiral
Motor insurance pricing is set to hold steady as companies benefit from another shift in the sector's dynamics, Deutsche Bank said as it recommendation on Admiral and kept Direct Line and Esure at 'buy'.
Admiral Group
2,726.00p
12:30 25/04/24
Direct Line Insurance Group
189.60p
12:30 25/04/24
esure Group
279.60p
17:00 18/12/18
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Admiral was upgraded to 'hold' from 'sell' by the bank, with its target price lifted to 1,880p from 1,845p.
The proposed revision of the personal injury discount rate, known as the 'Ogden rate' from a negative 0.75% to somewhere between 0%-1% will be beneficial for both Admiral and Direct Line, with one-off reserve releases likely either in
2017 or the first half of 2018 along with better competitive dynamics.
Previously Deutsche expected a higher level of price increases would be required to offset the impact of lower Ogden rate and attritional claims inflation on the new business, but now sees a 5-7% increase in insurance prices if the Ogden rate is set at 0.5%, compared with 8-10% increases for a -0.75% Ogden rate.
With prices having increased by around 6% so far this year, DB analysts don’t see an immediate risk of material price deflation.
"But equally there is limited prospect for further margin improvement from here," they wrote, prompting a reduction of 2018 and 2019 earnings per share estimates on average by 2% for Direct Line and 3% for Esure.
Direct Line is the preferred stock in the UK motor space for its attractive yield and long-term growth prospects of 2-3% leading to a 10%-plus total shareholder return.
"We also like its relative defensive position against the UK motor pricing cycle due to its control over distribution and relative diversification of its business."
Admiral's upgrade follows its 20% share price decline from the 2017 highs, with analysts also noting that "some of its competitive edge has now been restored" due to the Ogden change.
Esure is potentially most exposed to any downturn in the motor pricing cycle, though the analysts still see a "positive bottom-up story, with footprint expansion allowing the group to increase policy count and average written premiums leading to a strong growth in 2019e profits".