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Admiral: H1 results
Specialist motor insurer Admiral announced flat operating profits for the half year to June 2005, despite strong premia growth and lower reinsurance coverage. Operating profits for the period were £56.7m compared to £55.8m last year. A higher level of claims (a claims ratio of 71.6% against 63.9% last year) as well as a higher level of expenses (an expense ratio of 14.9% against 13.6% last year) were largely responsible for the slow growth.
The company ceded 24.7% of premia written in H1 to reinsurers compared to 29.2% last year. This implies that (other factors being equal) Admiral is absorbing a greater proportion of risk and could point to greater volatility in future earnings. The reduction in the premia ceded to reinsurers effectively boosted the company’s earnings by £3.8m.
The company admits that the market is both cyclical and that it is currently in a poor part of the cycle. This has been independently reconfirmed by actuarial analysis of the industry’s 2004 regulatory returns. However, Admiral continues to hold a view that “the cyclical pattern has changed and that the cycle will be less volatile and less severe than previous cycles”, meaning that past experience would suggest that the markets will get worse but Admiral hopes they will improve.
This specialised market for motor insurance is now highly commoditised and we see little prospects for long term growth, particularly since the markets are likely to weaken further. Increasing levels of competition are likely to put premiums under pressure and it is only a question of time before earnings weaken. A previous bout of high competition (in the 1990’s) in the motor insurance market led to a pricing war resulting in record loss ratios for insurers.
The share trades at 388p, on a prospective PE (2005 earnings) of 13x at the upper end of the sector range with a yield of 3.8%.
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