Admiral's share price falls despite posting record profits ~ Finance Update

MOTOR insurance group Admiral has seen its share price tumble, despite posting record half year results which saw revenues coming in at more than £1bn.

The Cardiff-headquartered FTSE 100 business, which employs 4,330 across South Wales and is actively recruiting, saw turnover rise 53% to £1.1bn on the first half of 2010.

Its board also announced a record interim dividend payment of 39.1p per share.

Boosted by a rise in premiums across the sector – although they are now flattening – it also posted record half year pre-tax profits of £160.6m, up 27% on the first six months of 2010

However, a worsening in its combined ratio – a key indicator in the car insurance sector of profitability – impacted on its share price, which closed down on the day 11.83% at 1353p, marking the worst performance on the FTSE 100

On the half year performance, chief executive Henry Engelhardt said: “Over £1bn turnover in six months! It wasn’t so long ago that we were pleased to report over £1bn turnover for a full year. This is an incredible achievement and is credit to the hard work of everyone at Admiral.

“In the UK the momentum of vehicle growth and price rises from 2010 and Q1 2011 carried us through the first half of 2011, although injury claims and their related costs continue to rise in the UK market, something to which we are not immune. As one of the lowest cost providers we are well placed for a future which is shaping up to be the survival of the fittest.”

Outside of the UK, where it has operations in the US, France, Italy and Spain, he said Admiral was continuing the tough job of building sustainable, profitable and growing businesses from scratch, including in France, where it only launched last year.

Having recently added Illinois to Maryland and Virginia, Admiral is currently looking to add another state in US in which to sell car insurance.

Mr Engelhardt said: “On a daily basis the new customers we get from outside the UK are now over 15% of the UK’s new business. Meanwhile consumer preference for price comparison shopping in our European markets is growing”.

Its overseas operations reported losses of £3.1m, which was down on the first half of 2010 when they came in at £4.1m. The combined ratio of its overseas operations was 157%, compared to 183% a year earlier. Anything below 100 denotes profitability – and above, losses.

For the UK, Admiral’s combined ratio was higher than in 2010 (82.99%) at 90.4%.

As a proportion of premiums, claims jumped from 67.8% to 77.5%.

Its diminished combined ratio position was impacted by an increase in insurance claims from previous years, which reduced its ability to release reserves – which only totalled £4m, compared to £17.5m a year earlier.

Despite the less favourable ratio level its UK car insurance, profits rose 28% from £135.5m to £168.2m.

Mr Engeldhart said: “All in all we’re pleased with the numbers for the first half of 2011. As a result, every member of staff will receive £1,500 of free shares in the group, worth over £8m in total.”

He said that the company’s philosophy was not to sit on cash and to return profits to shareholders.

He added: “We feel that if you keep money in a company then management teams tend to waste it. We would rather our shareholders ‘wasted it’ than us.”

Mr Engelhardt said that staff had “done a great job “in sustaining strong growth. He added: “They have again stepped up. It sounds easy, but it is a challenge all the time.”

He said that premium increases were felt in the first quarter but the market was now flattening out.”

Admiral’s price comparison subsidiary, Confused.com, saw profits down marginally on 2010 from £8.8m to £8.2m. However, its revenue of £40m was the highest in any half-year period.

On the impact of its new advertising campaign he said: “It is good but not great. It has steadied the ship and has gained some share back over the last six months. However, it is a rough industry. All the big four, Moneysupermarket, Confused, Compare the Market and Go Compare, make pretty good money, but less than a year ago.”

The big four will face competition from a new entrant into the market next year.

French financial giant Covéa’s, whose UK group of companies includes Swinton, MMA Insurance and recently acquired Provident, is assigning a £30m marketing budget for its new price comparison business – which has yet to be given a name. Based in Llantrisant, it is being headed by the former head of Confused, Debra Williams.

Mr Engelhardt said: “It is an interesting new dynamic in the market. It will be very interesting to see if they make a go of it, waste £30m, or change the economics of one company rival.”

Brokers Numis Securities upgraded Admiral’s shares to buy, while Nomura reiterated its buy recommendation.

Kevin Ryan, an analyst in Investec, said the UK insurance underwriting result was worse than forecast and the rising claims were evidence that Admiral’s ability to significantly outperform the market was diminishing.

Nick Johnson at Numis added it was the first time Admiral had highlighted claims-cost inflation as an issue.

He added: “Given that future profit commission earnings are linked to recent underwriting margins, the comments are bound to reduce earnings’ confidence.”

Admiral’s chairman Alastair Lyons said: “This August marks the 20 year anniversary of our chief executive and chief operating officer (David Stevens) working together.