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Thought i would start this post as an interesting article on the FT went by regarding UK motor insurance OGDEN, which is used to calculate personal injury claim. It would mean that reserves for past claims that have not yet been paid might have to rise, while the costs of future claims would also go up. Below is the article and those with greatest exposure namely Admiral and direct line. Also copied in current short positions on admiral. Announcement will be in February.

 

UK motor insurers braced for hit from higher injury payouts

Providers fear change to compensation rate when result of review is announced

 

It has been nine years since a serious traffic accident in the UK left a young girl with life changing injuries. Her father, who asked only to be known as Christy, says that after years of legal wrangling he has been left with a compensation payment that has done little to soothe concerns about his daughter’s financial future.

 

One of the things that particularly stung was the method used to calculate the compensation. The formula used by UK courts left the family with far less than they were expecting.

That could change next month, when Liz Truss, the Lord Chancellor, is due to announce the result of a review of the rate used by courts to work out lump sum compensation payments.

 

Any change to the so-called Ogden rate would potentially affect payments worth billions of pounds that are made by the insurance industry — especially motor insurers — and public sector bodies such as the NHS.

 

It would mean that reserves for past claims that have not yet been paid might have to rise, while the costs of future claims would also go up. Analysts at Macquarie have highlighted Admiral and Direct Line as the two insurers most exposed to the change. Direct Line’s latest annual report says a 1 percentage point decrease in the Ogden rate would wipe £190m off its profits.

Insurers would be likely to pass any added costs on to customers in the shape of higher premiums.

When calculating the size of compensation awards, the courts have to make an assumption about how much interest the money will earn when it is invested. This assumption is known as the discount rate — the higher the rate, the lower the initial lump sum required and vice versa. The rate has been set at 2.5 per cent since 2001, but interest rates have fallen sharply since then.

The Association of Personal Injury Lawyers has been campaigning for a change, saying that in a low interest rate world, 2.5 per cent is far too high.

“We think the rate has been wrong for many years,” says Neil Sugarman, president of Apil. “It assumes a far greater return than [people] are able to achieve, so they are in grave danger of running out of money.”

 

The Ministry of Justice says the Lord Chancellor has a duty to make sure personal injury claimants are fairly compensated and so has launched a review.

The process has been long and controversial. The government ran consultations on the issue in 2012 and 2013 but never released the results.

Apil wants to see the Ogden rate lowered to minus 0.5 per cent, reflecting the low investment returns available on safe assets. Analysts doubt the government will go so far, with many pencilling in a reduction to 1 or 1.5 per cent. Even that would have a dramatic effect on insurers.

According to James Shuck, an analyst at UBS, about 40 per cent of total claims costs would be influenced by a change in the Ogden rate.

“There will be an immediate impact — it could be painful in the short term,” says Kamran Hossain, analyst at RBC Capital Markets.

Share prices in the sector have already reacted. Since the Lord Chancellor announced the potential change in early December, Admiral’s shares are down 4 per cent and Direct Line’s are flat, while the FTSE 100 has risen 6 per cent.

 

The Association of British Insurers has launched a legal challenge, aiming to delay the decision. It says that, while victims should be adequately compensated, the government consultations on the issue have not been properly completed. The ABI lost in the High Court this month and was refused leave to appeal.

James Dalton, director of general insurance policy at the ABI, says: “Despite consulting over three years ago and not letting anyone know the outcome of that process, the Lord Chancellor seems to want to rush out a new discount rate at a time of significant global financial uncertainty.”

Mr Hossain says the impact of any increase would be felt more widely than the insurers themselves: “In the medium term, pricing will go up. The government is aware that if claims costs go up, prices will follow and they have been wanting to avoid that, for example with the whiplash reforms.”

Motor insurance rates have been increasing for two years and, according to figures from the AA released on Tuesday, are up 12 per cent in the past year.

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WM Morrisons is showing as an interesting trade. Supermarkets as most will know have been engaging in a price war. And consumer behaviour has moved from going to these huge stores to more online shopping + the emergence of the German stores. Now since BOE has stated that we can continue see a rise in inflation. Also a weaker sterling and current higher oil prices + the falling pound all impact on profit margins on the big 4 supermarkets. Net debt is expected to be around £1.2 billion at the year end. However, 2016/17 underlying profit before tax is now expected to be ahead of consensus. It is forecast to be in the range of £330 million to £340 million.

Current net short positions according to FCA are 4 major institutions with average short position of 1.04%.

From a technical standpoint anybody who knows elliot will comprehend the chart very well, currently appears that we are in W4 and the 248 level is very key as a breach of this level would signal continuation of a bullish trend.

18 molesworth road FLAT 1 BATHROOM.png

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Great chart, Elliot or not price is at very significant level, doesn't matter whether bulls or bears take control, once the outcome of the battle is decided look for an opportunity to climb aboard, up or down the targets are obvious. 

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From the chart you can see that it clearly is struggling against the 250 handle with a current base on 230. If the 250 is achieved then the uptrend is set to continue, but as you say the bulls and bears will have to decide this,. I will keep an eye on this as although its been a long time since i even touched a stock, you do see some nice trades now and then, NEXT, BT & EASY JET are to name a few. 

18 molesworth road FLAT 1 BATHROOM.png

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Hi , did you listen yet to the latest CWT podcast (110) with stock picker @RollyTrader, he has rigged a system that allows him to scan over a thousand charts everyday. He only takes a second or two on each to decide if it goes on his watchlist because he knows exactly what he is looking for, one shape only. Interesting take.

 

https://soundcloud.com/chat-with-traders

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, I agree but he has a very interesting approach, just looking for one chart shape then for just one or two setups to develope off that shape, even to the point of only ever going long ("I never really got the hang of going short"). :)

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