Half-year figures from motor insurer Admiral (ADM) may have revealed a solid underwriting performance - a more favourable claims experience helped the combined ratio (of claims to premiums) to improve by 7 percentage points compared with 2012's first half to a decently profitable 89 per cent. But rapidly falling premium rates, uncertainty from a competition probe, and doubts about the sustainability of the dividend payout - which absorbed 98 per cent of first half earnings - suggest long-term headwinds for the shares.
- Making decent underwriting profits
- Fat dividend yield
- Motor premium rates falling fast
- Sector facing competition probe
- Loss-making overseas unit
- Shares most of its business with reinsurers
In fact, the core UK division revealed an 8 per cent slide in premiums at the half-year stage, significantly driven by a 7 per cent fall in premium rates. That reflects cut-throat market conditions - according to the AA, the second-quarter average UK motor 'shoparound' premium quote slumped 9.8 per cent year on year. Moreover, with Admiral's management having flagged "intense competition" as rivals seek to grow market share, expect that pricing misery to continue.
Admiral's ability to benefit from the profits that it does generate is also limited by its reinsurance arrangements. It keeps just 25 per cent of its UK premiums, with the remainder being passed to reinsurers such as Munich Re, Hannover Re and Swiss Re. That leaves it sharing profits with third parties to a significant degree.
Sentiment towards motor insurers isn't being helped by the uncertainty generated from a Competition Commission (CC) probe into the sector, either. The CC's review is wide-ranging and the findings won't be reported for another year, although it is thought likely to focus on the sector's approach to non-fault accidents. Some analysts think that could lead to a ban on fees charged for arranging replacement vehicles for crash victims - potentially more bad news for insurers' earnings. Moreover, falling whiplash-type claims - reflecting legislative reforms since April to curtail fraudulent personal injury claims - have yet to deliver the sectoral upside that some had hoped for. Savings for insurers here, it seems, look set to be competed away amidst the sector's price war.
ADMIRAL (ADM) | ||||
|---|---|---|---|---|
| ORD PRICE: | 1,268p | MARKET VALUE: | £3.47bn | |
| TOUCH: | 1,266-1,268p | 12-MONTH HIGH: | 1,425p | LOW: 999p |
| FORWARD DIVIDEND YIELD: | 8% | FORWARD PE RATIO: | 12 | |
| NET ASSET VALUE: | 179p | COMBINED RATIO: | 89% | |
| Year to 31 Dec | Gross premiums (£bn) | Pre-tax profit (£m) | Adjusted earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2010 | 1.31 | 266 | 72.2 | 68.1 |
| 2011 | 1.84 | 299 | 81.7 | 75.6 |
| 2012 | 1.90 | 345 | 94.9 | 90.6 |
| 2013* | 1.90 | 372 | 102 | 98.5 |
| 2014* | 2.00 | 384 | 105 | 102 |
| % change | +6 | +3 | +3 | +4 |
*Bank of America Merrill Lynch estimates Normal market size: 2,000 Matched bargain trading Beta: 0.69 | ||||
Admittedly, Admiral's Confused.com price comparison site is making progress, and half-year price comparison pre-tax profits rose 22 per cent to £9.9m. But its international operation revealed a heavily loss-making 141 per cent combined ratio at the half-year stage - suggesting that profitability overseas remains a distant prospect. Meanwhile Admiral's investment portfolio - focused entirely on cash and short-duration bonds - managed a slender-looking investment return of under 1 per cent.
Even the impressively chunky dividend yield - nearly 8 per cent on a prospective basis - deserves caution. The prospective payout is barely covered by forecast earnings - which prompted analyst Nick Johnson at broker Numis Securities to observe earlier this year that "the lack of earnings cover means the yield is completely exposed to earnings setbacks".
Admiral's reinsurance arrangements make valuing its shares difficult. Comparing an insurer's share price with forecast net tangible assets (NTA) is the usual approach and, at present, most insurers' shares trade just above expected NTA. But as most of Admiral's business is underwritten by reinsurers, it needs less capital, meaning that its NTA is much lower than at its rivals. That leaves Admiral's shares trading on a fairly meaningless six times Numis's 226p a share estimate of full-year NTA.
