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UBS juggles ratings for UK motor insurers after Ogden discount rate reduction

Published: 14:38 24 Mar 2017 GMT

Car crash
UBS also initiated coverage on Hastings with a ‘buy’ rating and on esure with a ‘neutral’ rating.

UBS has upgraded its stance on FTSE 100-listed motor insurers Direct Line Group PLC (LON:DLG) and Royal and Sun Alliance PLC (LON:RSA), while downgrading Admiral Group PLC (LON:ADM), in a note on the sector entitled ‘How we learned to stop worrying and love the cycle’.

The Swiss bank’s analysts said the recent reduction in the Ogden discount rate for personal injury claims “ensures primary motor insurers need to increase prices substantially to maintain margins.“

The analysts estimated that around 15% price increases are needed for UK motor insurers to offset the impact of Ogden rate change (circa10%) and claims inflation (circa 5%).

However, they pointed out, the UK motor market is amongst the most competitive globally, with 75% of customers shopping around.

Low retentions key …

Therefore, the analysts said, they believe insurers with lower reinsurance retentions - such as Direct Line, Hastings Group PLC (LON:HSTG), esure PLC (LON:ESUR) – will be best placed in the near term, as these can “hold off price increases for longer and take market share in the meantime.”

They pointed out that such firms can “afford to delay price increases without adverse margin impact at the expense of those with higher retentions” such as Admiral.

UBS raised its rating for Direct Line to ‘buy’ from ‘neutral’, while upping RSA to 'neutral' to ‘sell’, and cutting Admiral to ‘neutral’ from ‘buy’.

The broker also initiated coverage on Hastings with a ‘buy’ rating and on esure with a ‘neutral’ rating.

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