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Admiral results stoke fresh UK motor fears

The drying up of reserve releases at top-performing UK motor insurer Admiral last week provided market watchers with a chastening reminder that they are all still vulnerable to claims inflation as the sector continues to struggle to return to the black.

Admiral announced on Wednesday (26 August) that its half-year combined ratio had widened from 82.8 percent to 90.4 percent as reserve releases slumped from £17mn to just £3mn.

The markets punished Admiral immediately, with the share price diving 12 percent during Wednesday, and the stock closed on Friday down 14 percent at 1,319p.

The results seemed to demonstrate that the UK motor claims inflation problems are so severe that even the darling of the sector is not immune. The development is likely to raise fresh concern about the reserving of less well-respected franchises.

Admiral put the drastic reduction in reserve releases down to claims inflation. "This is a consequence of increases in the projections of ultimate loss ratios on earlier underwriting years, in turn resulting from worse development in average claim costs on those years than was previously projected," the insurer explained.

A number of analysts flagged up the reserving in their notes as a cause for concern.

Espirito Santo Investment Bank analyst Joy Ferneyhough said: "Having dodged the UK bodily injury deterioration bullet for a number of quarters, Admiral's H1 2011 results appear to show that this situation has finally caught up with them.

"The reduction in reserve releases from £17mn to £3mn leads to flat underwriting profit in UK car insurance, despite 58 percent top line growth, and raises plenty of new concerns for investors."

Numis Securities analyst Nick Johnson also called investors' attention to the impact that claims inflation has had on reserve redundancies.

"This is the first time Admiral has highlighted this issue [claims inflation] and given that future profit commission earnings are linked to recent underwriting margins, the comments are bound to reduce earnings confidence."

Meanwhile, James Shuck of Jefferies International noted that "signs of stress" on the combined ratio had appeared for the first time, with management acknowledging that it is not immune to the wider environment.

Investors were also concerned about the impact a future ban on referral fees would have on the company's bottom line.

UK motor insurers have had a torrid time over the last couple of years and news that Admiral - which has consistently outperformed the sector - is experiencing claims deterioration puts the sector under the spotlight once again.

Lloyd's dedicated motor insurers have had a particularly bad time. Earlier this month Canopius signalled that this is likely to continue, with its dedicated motor Syndicate 260 expected to make a loss in both 2011 and 2012.

The private equity-backed insurer took over the management of Syndicate 260 last year from KGM and, working with Lloyd's, has overhauled its management and underwriting controls following brutal losses on the 2008-10 years of account.

Nevertheless it is currently forecasting a loss of 7 percent on capacity or £4.9mn for the 2011 year of account. In addition, it said in a Lloyd's circular that it expects to run a loss of 4.3 percent on capacity or £3mn in the 2012 year of account.

The travails of Equity Syndicate 218 are also well documented. The specialist insurer booked losses of £499mn in the 2010 calendar year as it strengthened reserves on a number of separate occasions, following a string of actuarial reviews.

Senior management was replaced as the syndicate's difficulties drew the attention of both Lloyd's and the Financial Services Authority, which subjected the dedicated motor syndicate to a Section 166 investigation.

Motor has been under sharp focus in recent times, with rates rising strongly and momentum growing for a ban on the controversial referral fees paid by no-win no-fee lawyers for new instructions.

In recent months the UK coalition government has started to give indications that it is preparing an outright ban on referral fees.

Prime Minister David Cameron told Parliament in response to a question that he was "very sympathetic" to a ban and "hoped to make some progress on this issue".

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