Car insurance specialist Admiral has recorded a sharp decline in shares after it warned that low interest rates and market volatility following the UK’s vote to leave the EU had undermined its capital reserves.
The Cardiff-based insurer, which owns the Bell, Diamond and Elephant brands, as well as price comparison site Confused.com, said lower interest rates had led to an increase in the liabilities’ value and slashed its capital.
This triggered a decline in solvency ratio—a gauge of financial strength—from 206 percent at the end of December 2015 to 180 percent at the end of June this year.
Geraint Jones, finance director of Admiral, commented: “What we saw immediately after the Brexit vote were quite sharp falls in gilt yields and risk-free interest rates. Lower interest rates mean bigger claims liability valuations and a lower solvency ratio.”
According to UBS analysts, the weakened solvency ratio had diminished the surplus capital available for the insurer to pay out to shareholders.
Admiral reduced its estimates for future payouts from £150-£200 million to £100-£150 million.
“The yield curves have moved pretty violently post-Brexit and we’re amending our estimates to say what we know at the moment, it’s more like £100m to £150m available for payout,” said co-founder and chief executive David Stevens in an interview with Bloomberg. “I don’t think it’s that big of a deal to the underlying economics of the company.”
Admiral warned of more potential risks from the Brexit including volatile interest and exchange rates, weaker British economy and limited access to the EU.
First-half results also showed a 4 percent increase in pre-tax profit to £193 million. Interim dividend also rose from 51p to 62.9p.
Revenue went up to £1.26 billion in the first half of 2016, as the FTSE 100 firm drew 340,000 more customers to its car insurance policies.
In spite of an increase in the cost of insurance cover, Admiral’s UK car insurance business saw a 16 percent increase in turnover to £222.8 million in the first six months of the year.
Insurers have increased motor cover to offset the increase in insurance premium tax and cover personal injury claims.
“In the core UK car insurance business, we’ve benefitted from an increasingly rational motor market with evidence of a move towards a less violent cycle. Prices have been rising, and we’ve used this opportunity to grow our motor book strongly,” Mr Stevens said.
Confused.com, which it founded in 2002, saw its profits surged to 8.3 million.
Across all its brands, Admiral saw a 15 percent increase in the number of customers to 4.82 million.