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New ruling could lower insurers’ dividends
Motor insurers are in the doldrums following worse than expected changes to the way personal injury claims are calculated. Analysts now believe the likes of Admiral (ADM) and Direct Line (DLG) will no longer pay special dividends which have previously made them firm favourites with income investors.
We highlighted the risks to the sector last month in Shares, pointing to analysis by investment bank UBS. It suggested a reduction in the so-called ‘Ogden rate’ from 2.5% to 1% had already been priced in to the value of insurance company shares.
The new rate has now been confirmed at -0.75% which will cause a bigger dent to insurers’ profit than the market had expected.
Ogden is used to calculate compensation payments to victims of car accidents based on the return any money paid out can earn when it is invested.
What is the financial impact?
The lower the rate, the higher the lump sum required. Direct Line had previously warned a one percentage point decrease in the rate would wipe £190m off its profit.
It now says the new discount rate will hit by pre-tax profit by £215m to £230m after reinsurance recoveries.
Admiral says the estimated total net financial impact of all claims settling at the new rate is £140m to £175m.
Premiums set to rise
UBS expects insurance premiums will have to rise and that customer churn could become a problem in the industry.
‘We expect this to lead to higher acquisition expense ratios across the industry, although this is beneficial for those trying to grow share.’
Among the insurers in a stronger position relative to some peers is Hastings (HSTG) which we flagged ahead of the changes as our preferred play in the space.
Although it says it will book a one-off £20m Ogden-related charge alongside full year results, it is not sitting on a backlog of liabilities which would be affected by changes to the rate.
It also enjoys low costs, has a well-integrated approach to price comparison sites and a solid technology platform.
Keep buying Hastings at 236.2p. Admiral and Direct Line are both well-run businesses, but now is not the time to buy their shares – even after their recent decline in value. (TS)