Admiral hoists dividend but solvency ratio sends 'worrying' signal
Insurer Admiral lifted its interim dividend by almost a quarter as the UK car and home insurance businesses cruised ahead, but profits were short of City forecasts and analysts angsted about a sharp drop in the Solvency II position in the half.
With group turnover of £1.26bn in the six months ending 30 June up 19% on the same period last year, group profit before tax rose 4% to £193m, though this was marginally short of the £191.8m consensus forecast, with earnings per share up by 2% to 55.9p.
The interim dividend was lifted 23% to 62.9p, of which 11.9p is an additional return of capital as a result of its strong solvency ratio.
This was despite the solvency position being hit by market volatility that resulted from the Brexit vote, with the Solvency II coverage ratio collapsing from 206% to 180% by the end of June as a significant reduction in interest rates increased group liabilities, especially in respect of its unstated PPO exposures, and hence reduced its own funds.
On Brexit, though management noted various risks, they do not currently foresee a material adverse impact on day-to-day operations.
The loss ratio fell to 59.5% from 60.8% a year ago and 65.1% for the full year, while the combined ratio slipped to 82.2% from 82.7% a year ago and 85.6% for 2015 as a whole.
Chief executive David Stevens hailed the favourable market conditions for car Insurance business, with an "increasingly rational" motor market showing evidence of a move towards a less violent cycle, enabling a 16% increase in turnover, a 217,000 increase in customer numbers and a record first-half profit of £222.8m.
Although turnover from international car insurance rose 44% to £159.2m, losses also increased to £12.9m from £11.2m as investment was made to expand the US Elephant operation.
UK household insurance also recorded continued strong growth (reaching 382,000 customers), improved key metrics (including expense ratio) and another profitable half year.
Confused.com in the UK grew revenue 16% to £0.9bn and increased profit 73% to £8.3m but with investment in US-focused compare.com, the divsion as a whole saw losses of £1.1m, though these were cut by almost three quarters on last year's.
Stevens said the results showed "the enduring, and indeed increasing, strength of the UK business and has seen a step change upwards in growth from our developing international businesses", while the growth of the UK household insurance book demonstrated Admiral's ability to expand successfully beyond car insurance.
Broker Shore Capital said the small miss against consensus was "a rare occurrence for Admiral" but the comments around the group’s Solvency II position and Brexit "were the most worrying, to us, and does question the wisdom of Admiral’s return of capital strategy".
On the solvency ratio, analyst Eamonn Flanagan noted that the group hopes to avoid further such falls via the use of a volatility adjusted yield curve, which would have increased the figure back to 196%.
"We await details of this move and whether it will impact the group’s return of capital strategy. We also wait to see what Brexit brings the group in respect of its Gibraltar domicile and the passporting rules for its European operations."
RBC Capital Markets agreed that the solvency ratio was "more sensitive" than it had expected.
"Sensitivities suggest that Admiral would see a further 26% decline if interest rates declined a further 50bps. Although the company is adequately capitalised with a 180% Solvency II ratio, we believe that this volatility in a UK motor insurer's ratio will be taken negatively."
Indeed, shares in Admiral fell sharply in early trading, and by 0826 BSt were down 6.5% at 2,107.4p.