Claims inflation is accelerating at a pace that UK motor insurers cannot keep up with, according to a new report by Jefferies.
Even with prices rising, the company says, it expects margins to deteriorate significantly: “We expect DLG to cut its 2022 dividend, prompting us to downgrade our rating to Hold. For Admiral, commissions will likely be at much lower levels given worsening margins, prompting us to downgrade our rating to Underperform.”
Sabre’s recent profit warning indicates an even worse outlook than expected, worsening guidance to a mid 90%’s combined ratio compared to 79.4% in 2021 – well above its 70-80% target range.
This, they say, is a result of rapidly increasing inflation, with claims severity increasing to +12% in Q2 this year compared to +8% in 2021. This is consistent with claims inflation across the market, which continues to run at very high levels (Jefferies estimates car damage inflation is +13% in Q2), whilst market pricing has been unable to keep up (new business premiums only up +9% YoY in May).
The company estimates a market combined ratio of 116% for 2022F (EY estimates 114%).
Admiral is expected to report a current year loss ratio of 94% in 2022. The 2022 underwriting year combined ratio reported by Admiral at half-year will be particularly important, and is likely to disappoint.
The report forecasts an initial underwriting year combined ratio of 115% and 113% for 2022-23F which will subdue profit commissions going forward.
The main reason for that is that Admiral does not receive commissions until a 97% combined ratio is achieved, which we do not expect to happen until 2026 at the earliest for the 2022 underwriting year.
