Admiral Group Plc, the insurer of 3.6 million U.K. vehicles, rose the most in three months after Goldman Sachs Group Inc. upgraded the stock, saying the company will benefit from the falling cost of automotive claims.
Admiral advanced 4.9 percent to 1,211 pence in London trading, the biggest climb in the FTSE 100 Index of leading U.K. shares. Analysts at Goldman Sachs led by Ravi Tanna upgraded the stock to buy from hold and said it has the potential to return 30 percent over the next 12 months.
Admiral has underperformed the Stoxx Europe 600 Insurance Index over the last six months as U.K. auto-insurance premiums declined while claims for bodily injury continued to rise. The British government is proposing a series of legislative changes, such as capping whiplash claims and limiting fees paid to so-called “no win no fee” lawyers, to hold down costs and premiums, which doubled in the three years through 2011.
“We believe there is potential for claims inflation to decline faster than the market expects,” Tanna wrote in a note to clients today. “As a result of renegotiated reinsurance terms, the group has significant gearing towards lower claims inflation.”
The insurer, led by chief executive officer, founder and biggest shareholder Henry Engelhardt, reinsures about half its premiums with companies including Munich Re. After renegotiating terms with its reinsurers, Admiral is entitled to 90 percent of its underwriting profit while taking 25 percent of the risk, Tanna said in the note.
“This makes it the most geared company in our coverage to improving trends in motor claims,” Tanna said.