Shares in motor insurer Admiral (ADM) tanked by 8% to £20.04 as it is hit by rising personal injury claims due to a change to the Ogden discount rate.
Shares discussed the change to this method of compensation when rival home and car insurer Hastings (HSTG) reported its first half to 30 June results. Essentially the Ogden discount rate was moved from 2.5% to -0.75% in March which had already impacted Admiral’s second half to 31 December 2016.
CEO David Stevens says ‘Most of the adverse impact from the increase in the costs of large injury claims, resulting from the change in the Ogden discount rate, was captured in our 2016 second half result. However, some extra costs carry into 2017’.
The change to the rate has caused widespread dismay in the insurance industry and the government had been expected to make a ruling on how it should be resolved. Admiral says it will cost the business £150m, which is unchanged from six months ago.
LIGHT AT THE END OF THE TUNNEL
Despite the increase in personal claim payouts, Admiral’s results to 30 June were otherwise pleasing. It reports a 15% rise in turnover to £1.45bn and its net revenue up 8% to £0.55bn.
The company’s first half pre-tax profit beat Edward Morris, analyst at JP Morgan, forecast by £7m, coming in at £195m. The insurer’s car segment did especially well, with pre-tax profits £9m ahead of Morris’s estimate.
Admiral’s interim dividend figure of 56p also bettered Andreas van Embden, analyst at Peel Hunt, forecast of 52p. This includes no additional return of capital as the company says it needs further guidance until the internal model capital position is clear. This is expected in late 2018.
Peel Hunt’s van Embden says that Admiral’s premium valuation means that there are more attractive valuations in the sector. Using his figures, Admiral trades on a 2017 forecast price-to-earnings (PE) ratio of 18.9 times with a dividend yield of 5.6%.
JP Morgan’s Morris is more upbeat, predicting modest positive growth in the company’s new international businesses, giving an end of year target price of £21.00. A 5% upside although this is only after the share price sank on Wednesday.
