Last week in these pages, the co-founders of Metropolis Capital – Jonathan Mills and Simon Denison-Smith – outlined the reasons why they thought Admiral (ADM) would outstrip its rivals in the UK non-life insurance market over the long run. That space is a little more competitive than it used to be due to the proliferation of price comparison sites. But increased price sensitivities work to the insurer’s advantage as it remains the low-cost provider in the market.
And that is doubly important because many insurers are increasingly focusing on keeping a lid on costs, although indemnity commitments for many insurers are not falling at a time when they are being forced to allocate ever more capital to digital channels to update legacy systems.
The group’s latest half-year trading update suggests that Messrs Mills and Denison-Smith are on the money. Admiral is guiding for “a higher than expected” statutory profit in the range of £450m-£500m, citing higher reserve releases and profit commission revenue as motor claim numbers have been held in check due to people driving less during the Covid-19 lockdowns.
Management doesn’t expect to see a repeat of the reserve releases and profit commission over the remainder of the year, although it notes that claims frequency in the year to date has been lower than anticipated as the lockdowns dragged on interminably. However, analysts from Deutsche Bank believe that “reserves are likely to have pushed above the top-end of the group's reserving policy, which would suggest higher than normal releases for the next few years”.
Shareholders will be pleased with Admiral’s progress against a unique claims environment, but overall conditions for the industry are far from favourable. Lowly interest rates continue to keep earnings in check (insurers have increased their focus on underwriting profitability), along with intensifying competition for repeat business. And there is every chance that UK economic growth will tail off following the initial bounce-back once all the Covid-19 restrictions are lifted. That usually translates to lower demand for general insurance products. On the plus side of the ledger, industry margins could become less volatile as a larger proportion of claim liabilities are borne by reinsurers.
Admiral has been taking steps to diversify, albeit incrementally, from its core auto insurance business, which still represents the backbone of the business. An intensified focus on new ventures and emerging consumers is set against a rapidly evolving market in the UK.
The steady transition to the knowledge economy, a process accelerated by the pandemic, has shifted the focus of general insurance from tangible to intangible risks, evidenced by increased underwriting for cyber insurance. Analysis from EY indicates that “in all lines of business, the Internet of Things and connected insurers will mean that risk can be monitored in real time, increasing the ability for insurers and customers to prevent risk”.
With the latest Delta covid variant doing the rounds, it is possible that Admiral could again benefit from an overall drop in the national mileage through the final quarter of the year. At any rate, the group recorded a favourable current period loss ratio, despite significant reductions in premium rates. More importantly, at least for shareholders, is that the proposed 2021 interim dividend is expected to be in the range of 110p -125p a share.
