Admiral rejects analyst call to raise prices and cut volume
Admiral today rejected criticism that it is undercapitalised by £99m and that it will have to cut growth while raising prices to plug the gap.
Analyst Marcus Barnard, Oriel Securities, believes Admiral is operating with £99m too little capital and has a problem with claims coming through from prior years.
Barnard, believes the share price will drop from 1200p to 740p, and says in a note to the City: “We believe the company’s best strategy going forward should be to raise prices, drastically reduce its growth strategy and rebuild reserves.”
However, Admiral today stressed that it ‘disagreed fundamentally’ with the analysis.
A spokesman said: “Our point, and our view on the world, is that we are actually over-capitalised and over-reserved, very much not under-capitalised and under-reserved.”
Asked about raising prices, the spokesman said: “The half year slides shows that we are writing combined ratio in the 80s. It shows that we are making 20 percentage points of profit for every pound of premium we write, that doesn’t suggest that as an insurer we will have to dramatically raise prices.”
The focus of the disagreement lies around Admiral’s negative incurred but not reported (IBNR) figures.
The negative IBNR is the difference between what Admiral’s claims department reserves for claims and the independent actuarial assessment combined with Admiral’s own internal view.
Management take all this into account to decide what should be reserved in the statutory accounts.
Admiral argues that the claims reserves is higher than the actuarial assessment of the ultimate outcome. This effectively means there is excess capital which can be used for reserve releases if desired.
In contrast, Barnard believes the negative IBNR indicates Admiral has accelerated reserve releases, bringing forward profit from future accounting periods into current accounting periods.
The end result is that claims reserves are lower and capital and shareholders’ funds are bigger by £99m.
He points to Admiral having to readjust its ultimate loss projections for 2009 because of worsening bodily injury data.
The company’s net reserves released were £4m in the first half of 2011 compared to £17m in the same period last year due claims coming in from earlier years worse than Admiral expected.
Although the company has readjusted ultimate losses due to new information, it stresses that capital buffers remain strong and will continue to do so to keep up with its growth.
The Cardiff-based insurer currently holds an 11% market share, making it second only to Royal Bank of Scotland Insurance in personal lines motor rankings.
Admiral is due to give third quarter results on Wednesday, November 9.
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