Shares in insurers Admiral Group PLC (LON:ADM) and Direct Line Insurance Group PLC (LON:DLG) took a hit after UBS downgraded its stance on the two stocks.
UBS said UK motor insurance pricing has disappointed in the year to date and continues to lag elevated claims inflation, putting margins under pressure.
It cut its rating on Admiral to ‘sell’ from ‘neutral’ and left its target price at 2,000p.
READ: Admiral posts better than expected 2018 profit inflated by Ogden rate-related reserve releases
“Admiral's shares are currently trading about one standard deviation above historic averages relative to UK property and casualty peers, having outperformed by 10-40% on a one-year view,” UBS said.
“We believe some level of relative outperformance has been historically justified, given Admiral's stronger profitability vs. the UK motor market, more prudent reserve buffers, strong management team and improving international businesses.
“That said, from here we find heightened risk to valuation, with Admiral's earnings under pressure, and expectations around capital returns high.”
UBS said its 2019-20 earnings per share estimates are about 5% below the consensus market forecast and its 2019-20E dividend per share estimates are 7-15% behind.
Shares fell 1.05% to 2,164p in early afternoon trading.
The investment bank lowered its recommendation on Direct Line to ‘neutral’ from ‘buy’ and reduced its target price to 330p from 390p.
READ: Direct Line declares special dividend as 2018 profit rises 8%
“We downgrade Direct Line to neutral on continued weak UK motor pricing datapoints,” it said.
“Our previous buy thesis assumed Direct Line could offset near term pricing pressures with cost save potential.
“Whilst we still expect the company to reduce the expense ratio by five percentage points over the next five years, this is not enough to offset increasing loss ratio pressure amidst a fiercely competitive UK motor insurance market.”
Shares declined 2.07% to 317.5p.