Deutsche Bank reckons Admiral PLC (LON:ADM) is set to be a major beneficiary in the government’s rethink on the personal injury discount rate.
The government recently proposed that the so-called Ogden rate be set at somewhere between zero and 1%, which so far as insurance companies are concerned is a big improvement on the -0.75% rate introduced in March 2017 – especially as prior to that the rate was 2.5%.
The rate is used in calculating future loss of earnings in insurance claims. The settlement is ‘discounted’ by the amount of interest the claimant can expect to earn from a lump sum settlement, so a negative discount rate, which is what we currently have, actually bumps up the size of the settlement.
The German bank has modified its previous analysis on what effect on price the new personal injury discount rate would have, taking into account the government’s latest U-turn on car insurance.
As well as Admiral, which it has upgraded to ‘hold’, it thinks Direct Line Insurance Group PLC (LON:DLG) should also be a clear beneficiary, with one-off reserve releases likely either in 2017 or the first half of 2018 along with better competitive dynamics. Direct Line is rated a ‘buy’ by Deutsche (DB).
DB calculates that car insurance companies would have to lift prices by 5-7% to maintain margins should the Ogden rate be set in the middle of the indicated range, at 0.5%. Its previous analysis, based on a negative discount rate of 0.75%, assumed an increase of 8-10%.
With year-to-date prices up by around 6%, DB says it does not see an immediate risk of material price deployment, but equally there is limited prospect for further margin improvement from here, which prompted DB to reduce its earnings forecasts for fiscal 2018 and 2019 by around 2% for Direct Line and 3% for esure Group PLC (LON:ESUR). The target price for esure has been trimmed by 5% to 300p.
“We have always maintained that Admiral is a high quality business but with an even higher valuation; however, after c.20% decline in its share price from the YTD [year-to-date] highs, we upgrade our recommendation from Sell to Hold and also note that some of its competitive edge has been restored with the partial Ogden rate reversal. Nevertheless we still believe that Admiral will face higher competition in its core segment from the likes of esure which will result in its average written premium shrinking over time, putting pressure on margins,” DB said.
It has nudged up its price by 2% to 1,880p but leave its FY18-19 earnings per share estimates broadly unchanged.
Meanwhile, esure shares surged 6.6% on Monday morning on reports that its biggest shareholder, Peter Wood, is looking to sell his stake.
Shore Capital is unimpressed with those chasing the shares higher on bid speculation.
“The idea that Peter Wood might be considering an exit too does not surprise us. The forthcoming reversal of the Ogden discount rate moves is likely to lead to a rate war, as previously impacted companies seek to regain the market share they lost these past 6 months to the likes of esure and Hastings,” Shore’s Eamonn Flanagan said.
It recommends that shareholders follow the “speculated lead” of Peter Wood and dump their shares.