Motor insurance shares have gone into reverse after disappointing premium figures from the AA.
The recovery service said car insurance premiums rose 0.2% in the fourth quarter of 2014, but this follows a 1.2% rise in the previous three months. The AA said rising personal injury claims meant current prices were unsustainable and the underlying trend for premiums was up. But analysts are less convinced about the outlook for insurers, while their shares are among the day’s leading fallers.
Admiral has dropped 35p to £14.17, esure is off 7.7p at 225.8p and Direct Line is down 1.3p at 308.5p. Analyst Eamonn Flanagan at Shore Capital said:
The latest AA Insurance index... makes for awkward reading for both the industry and for those pushing the motor insurance sub-sector higher since the start of the year on the back of an expected turn in the rating environment.
According to the AA Insurance, UK personal motor rates rose by just 0.2% in the fourth quarter 2014, a slowdown compared to the 1.3% increase reported in the third quarter. This equates to around 1p per policy over the quarter and makes a mockery of the recent rally in share prices of the quoted motor insurers.
This increase does not represent a turn in rates, to us, and is totally inadequate to offset what we believe is a deteriorating claims environment, both in respect of frequency (which the AA Insurance suggests has risen around 8% since the end of March 2014) and average claims amount. Overall, rates are around 10% lower than a year ago. The AA Insurance is hopeful for single digit growth in rates in the coming year.
As a consequence, and especially given the recent uptick in stock prices, we reiterate our sell recommendations on Admiral, esure, and Direct Line.
Meanwhile Morgan Stanley also issued a downbeat note on the sector:
2015 could see a tipping point for top-line growth and margin expansion in UK motor. We have yet to see enough evidence of insurers feeling sufficient pain to drive premiums swiftly higher.
At the start of 2015 we think it remains premature to get bullish on UK motor names, given fundamentals continue to be challenging. Although it lagged the Stoxx Europe Insurance Index for 2014 as a whole, Admiral actually outperformed in the final months of the year, and has continued its strong performance into 2015. We believe this is partly due to investors anticipating significant improvement in the UK motor trading environment. We would urge continued caution and remain underweight the stock. We are more positive on Direct Line (equalweight) as we see a broader array of drivers for stock performance there.
Our base case remains an elongated ‘U’-shaped recovery in UK motor, rather than a (more bullish for stocks) sharp, ‘V’-shaped outcome.
For UK motor insurers as a whole, we believe modest price increases will mean continuing earnings pressure during 2015, all else being equal. Insurers point to a market level of claims inflation of around 4%. Price increases of at least this amount would therefore be required for insurers as a group to stand still economically.
