Admiral increases customer base as Covid effects reverse

Fewer cars, fewer claims. Some time ago, the Association of British Insurers confirmed that the number of motor insurance claims settled by insurers fell by 19 per cent in 2020. The challenge for insurers was readjusting premium rates in expectation that motorists would eventually return to their vehicles. Underwriting is always a fraught process, but risk management took on a whole new dimension during the pandemic.

These difficulties are reflected in full-year figures for general insurer Admiral (ADM). The fall-away in auto claims due to the pandemic reversed through 2021-22, and the resultant financial drain was exacerbated by inflationary effects. Reported pre-tax profits fell by a third despite management’s assertion that Admiral has implemented “strong pricing action to combat claims cost inflation”.

Outgoing chair Annette Court also pointed to cyclical effects, but the problems really stemmed from the unwinding of unique circumstances. And there is always an inherent drag between the imposition of increased prices and rates and their impact on underlying profits.

The group’s combined ratio – the sum of incurred losses and expenses divided by earned premium – increased to 101.7 per cent from 85.2 per cent last time around. This was accompanied by a deteriorating loss ratio. Prices in the motor insurance segment are up by a fifth over the past 12 months, which gives some idea of the increased claims frequencies. In all, net insurance claims increased by 52 per cent.

Court rightfully points to the fact that customer numbers are up 11 per cent to 9.28mn, and the group’s solvency remains strong. FactSet consensus points to a combined ratio of 90.5 in 2023 and a 25 per cent increase in return on tangible equity. The dividend cut won’t help market sentiment, but a prospective yield of 6.2 per cent looks achievable, and a forward rating of 15 times consensus isn’t too much to ask. Buy.

Last IC view: Buy, 2,288p, 18 Aug 2022