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Admiral: Full year results
Recently listed motor insurer Admiral’s reported a 30% increase in what they call ‘core profits’- a slightly misleading term for statutory operating profit (plus interest receivable and less charges for staff share schemes, goodwill amortisation and bonuses paid in lieu of dividends) for the year to December 2004. The term is misleading in this instance because the growth is entirely due to an increase in other income. Admiral’s underwriting profits dropped 9.9% to £27.9m in the year to December.
The company earned profit commissions of £21.6m this year (2003:£1.4m), which together with a 47% increase in other income (to £56.9m) accounted for all the growth. Admiral receives profit commission based on business placed through its proportional co-insurance and reinsurance arrangements. (The amount of commission receivable is dependent on the volume and profitability of the insurance business placed)
Premia written grew 27% to £470m, the fastest recorded by the company in the last five years. The number of policies in force grew by almost 30% to 1,008,000. The company now has a market share of approximately 4% of the UK private car insurance market.
The number of new policies sold rose by 45% to 557,000 which the company attributes to its new internet based selling strategy. During 2004, Admiral’s share of the internet new business market remained above 20%. For the car insurance market as a whole, new business sourced from the internet is of increasing importance, making up 38% of total new business up from 30% last year.
According to AC Nielsen, the car insurance market has seen a 41% increase in advertising spend over last year, an indication of the level of competition in the market. According to Admiral’s estimates premium rates in the overall market have reduced by around 3% during the year. A recurring problem with the relatively low risk motor insurance business, is that the low level of risk tends to attract competition and pushes rates down unprofitable levels.
The company’s own rates have finished the year about 2% below that of last year, whether the rapid growth in policies written this year will translate to higher levels of losses next year is a factor to watch. Ominously, the loss ratio has increased to 67% this year from 52% in 2003. Initial estimates for the current years loss ratio is 79%, although this is likely to reduce with the release of reserves. A previous bout of high competition (in the 1990’s) lead to a pricing war resulting in record loss ratios for insurers.
Admiral expects the market to deteriorate from the peak levels of profitability seen in 2001/2 for this very reason .
The company has enjoyed rapid growth in the past but increasing competition, in what is essentially, a commodity business do not auger well for the future. The stock trades at 346p on a prospective PE of 12.9×.
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