Admiral pays out special dividend after smashing forecasts

Making money in insurance is about writing the greatest number of policies at the point when new business is most profitable. It is an art that Admiral (ADM) has mastered to a fine degree after taking advantage of a consistent recovery in motor, property and accident insurance rates over the past 18 months to deliver a consensus-beating performance, along with evidence of operational gearing.

The Cardiff-based insurer registered a 32 per cent increase in pre-tax profits to £310mn, while turnover increased by 43 per cent to £3.21bn. Income investors were pleased with a big special dividend worth 19.7p a share, or equivalent to an approximately £60mn payout. On top of its normal dividend, which also increased, this meant the insurer plans to pay out 71 per cent of its earnings for the half, which translates to a broad payment of £217mn in dividends.

Admiral seems to have benefited from modestly cutting its rates at the start of the year just as the general market was still increasing. UK Motor profit in the first half was £359mn, 20 per cent higher than the same period in 2023. This was due to better average premiums coming through following rate increases over the past two years, along with fewer claims.

The core motor loss ratio was 59 per cent, while management noted that claims inflation was reducing. The company expects full-year claims inflation to be in the high single digits, compared with 10 per cent for 2023, while there is no evidence that the frequency of claims is increasing.

Household insurance also made a notable contribution, and after a half of steady premium price increases, turnover rose by 37 per cent to £215mnn. Meanwhile, the number of households insured increased by 8 per cent to 1.8mn.

Admiral’s return on equity advanced by 6 percentage points to a high of 45 per cent as more profitable new business came through. Chief executive Milena Mondini de Focatiis said: “Given our earlier pricing response to inflation in previous years, we have been able to be more competitive in the first half and this helped grow our customer base 12 per cent to 10.5mn.”

It is often difficult to get a handle on Admiral because the valuation at over 20 times consensus forecasts for 2024, falling to 18 times for 2025, is daunting when there are cheaper alternatives. But perhaps quality should win out. Buy.

Last IC view: Hold, 2,650p, 7 Mar 2024