The UK motor insurance market is one of the toughest markets to navigate in the world.
Indeed, UK motor insurance industry as a whole has been loss-making for 20 of the past 21 years. 2013 was the only year in recent history when the sector has reported an underwriting profit.
So, Admiral’s (LSE: ADM) growth and record of success since its founding in 1993 is extremely impressive.
And according to today’s trading update from the company, Admiral is still racking up steady growth in a tough market.
Steady growth
Admiral’s first-half profit for 2015 increased by 0.6% from a year earlier to £186.1m. These results were boosted by higher reserve releases. The group released £92.6m of reserves set aside for claims in previous years, compared with £73.1m pounds in the first half of 2014.
Earnings per share for the period increased by 4% to 54.8p, beating City expectations. Analysts were expecting Admiral to report first-half earnings per share of 47.0p.
Net insurance premium revenue, which takes into account reinsurers premiums, slipped 1.2% to £228.9m in the half, down from £231.7m as reported a year earlier. Moreover, other revenue from insurance products sold alongside car insurance declined 3.2% to £165.0m. Still, while income contracted across many of Admiral’s divisions, a 19% fall in net insurance claims helped boost profitability overall.
What’s more, during the first half of the year, Admiral’s combined ratio, a measure of profitability, declined to 82.7%, from 85.1% a year earlier. A combined ratio below 100% indicates that the company is making an underwriting profit. Admiral’s combined ratio is actually on of the best in the UK motor insurance market. Peers esure and Direct Line Insurance (LSE: DLG) reported combined ratios of 95.8% and 89.4% respectively.
A better play?
Admiral has become one of the FTSE 100’s most treasured income stocks over the past few decades. Indeed, the company has adopted a stance of returning the majority of its net income to investors via dividends.
Over the past five years, Admiral has returned a total of £1.1bn to investors via both regular and one-off dividend payouts. This cash return works out to be around 90% of Admiral’s net income generated over the period.
As Admiral has one of the lowest combined ratios in the insurance sector, investors should be set to receive lofty dividend payouts for years to come.
That being said, Direct Line is quickly catching up to its larger peer. Over the past three years, Direct Line’s combined ratio has fallen steadily, as the group has cut costs and diversified away from the UK motor insurance market. For example, Direct Line’s combined ratio stood at 98.8% for full-year 2012. As noted above, the group reported a combined ratio of 89.4% for the first half of 2015.
A new dividend champion?
Direct Line has a cash-rich balance sheet, and could be gearing up to announce a hefty special dividend payout. The insurer’s risk-based capital coverage ratio was 155.9% at the end of June. Management is targeting a coverage ratio of 125% to 150%, anything above that level can be considered to be excess capital.
Management has stated that it will consider returning excess capital to shareholders when it reports full-year results for 2015. Direct Line has already issued one special payout this year.