2022 has been a calamity for Admiral Group (LSE: ADM) and its share price. It’s now 33% cheaper than it was at the turn of January. So the FTSE 100 insurer carries a large 8.6% yield for this year based on its current dividend forecast.
A lower dividend payment is predicted in 2023. But this still creates a market-beating 6.5% dividend yield for next year.
The beauty of buying Admiral shares is the resilience of the general insurance industry during economic downturns. As the cost of living crisis worsens, revenues here should remain relatively buoyant versus many other UK shares.
This is especially so for motor insurance specialists like Admiral as driver insurance is a legal requirement. Admiral is Britain’s biggest operator here with a market share in the mid-teens.
Soaring costs
The trouble here, however, is that claims inflation is soaring. Rivals Direct Line and Sabre have both recently issued profit warnings because of soaring costs. I think Admiral could be the next business to slash earnings forecasts when it updates the market on Wednesday, 10 August.
On the plus side, insurance companies are benefitting from an improving pricing environment. The problem though is that premiums aren’t increasing anywhere near the rate at which claims inflation is.
The Association of British Insurers (ABI) says that the average motor premium rose to £419 in the second quarter. That was up just £5, or 1.3%. To provide a comparison, Sabre said last month that claims inflation had hit 12% during the first half.
The worry for insurers is that multiple problems are driving claims inflation through the roof. And as the graphic below reveals these issues could persist long into the future.
Of course Admiral can try to hike prices to narrow the difference. But in a highly competitive market, the business could witness a sharp fall in volumes as a result. This is particularly dangerous today as Britons grapple with a worsening cost-of-living crisis.
Dividend forecasts fall
So what will this mean for Admiral’s dividend forecast? Well judging by recent broker activity, it could be looking pretty grim.
Take what analysts at JP Morgan, for example, have been doing. Last month they slashed their medium-term dividend forecasts for Admiral by more than a third. They cited the company’s deteriorating profits outlook and the effort it will need to maintain a healthy Solvency II capital ratio.
I think further downgrades could be coming down the line from more City brokers, particularly as anticipated earnings are already lower than expected dividends. In 2022, for instance, anticipated earnings per share of 137.6p are well below an expected 169.1p dividend).
Admiral’s gigantic dividend yield is mighty tempting. But all things considered I’d rather buy other UK dividend shares.