Investors have panicked over a warning from car insurance specialist Admiral (ADM) about low interest rates weakening its capital strength. Its shares fall 8.2% to £20.68. This seems an over-reaction given that it still has a very strong capital for companies in its sector.
The Confused.com owner says market volatility has impacted its solvency position in the first half of the year, due to higher regulatory valuation of claims liabilities and lower capital.
It notes that low interest rates, which were recently cut by the Bank of England to 0.25%, increased the value of liabilities for claims. Future interest cuts may hit Admiral’s solvency if the UK economy fails to grow.
The solvency ratio, which is used to measure if a firm can meet its long-term debts, declined from 206% to 180% over the first half of 2016. The current ratio is still strong as a ratio of 100% means all liabilities can be covered.
Chief executive David Stevens says: ‘The last six months have shown the enduring, and indeed increasing, strength of the UK business and has seen a step change upwards in growth from our developing international businesses.’
Admiral believes its daily operations will not be materially impacted, but emphasised that exiting the EU may create less favourable economic conditions in the UK and in the countries it operates.
Pre-tax profit increased by 4% to £193 million in the first half of 2016, driven by higher turnover and customer numbers.
The interim dividend has been hiked by 23% to 55.9p.