According to data from analyst Consumer Intelligence the average car insurance premium increased by nearly 50% in the year to June. While this has led to accusations of profiteering by insurers from consumer groups the opposite is true.
Even though car insurance premiums have risen to a record high, the industry suffered its worst underwriting performance in a decade last year, as the cost of claims spiralled out of control.
According to consultancy EY, the UK motor insurance sector combined ratio, which shows claims and costs as a proportion of premiums hit 109.5% - anything above 100% means the industry is making a loss on its underwriting. The consultancy also believes the industry will lose money in 2023, but could return to a positive underwriting position by 2024.
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A unique business
Motor insurance has never been a particularly profitable business. Historically, the industry has consistently lost money, but some operators have been able to carve out a unique niche for themselves and achieve impressive profits doing so.
Admiral (LSE: ADM) is one such company. The group’s various brands make up just over 11% of the U.K.’s motor insurance market making, meaning it’s the single largest market player. Since its inception in 1991 (it took two years for the business to get off the ground), Admiral has been focusing on doing things a little differently. It rose to prominence by taking on risks others were trying to avoid. These were not necessarily the riskiest propositions, but those that were harder to understand. The young driver in central London, for example, or older driver of classic cars. The company could write these risks as it spent heavily on technology and risk assessment, even in the early days.
And the group continues to follow the same path today. Admiral was pushing rates higher long before its competitors. It realised the market was changing, and changed ahead of the market, pushing premiums up 21% year-on-year in the first half.
Granted, the company lost market share, with the number of motor customers falling by 7%, but that’s part of the game in the insurance world. Good insurers don’t write more business if they can’t do so profitably. Making money on five customers is far more important than losing money on ten. And Admiral is writing profitable business.
Its two main listed peers, Direct Line (LSE: DLG) and Sabre Insurance (LSE: SBRE) have both issued severe profit warnings over the past 18 months. RSA, another insurer that was taken private in 2020, has decided to exit the UK motor market altogether, pulling its More Than brand in the process. Admiral has escaped most of this pain by moving ahead of the crowd.
Growth potential
The real potential for the group is in the non-motor market, namely pet, home and travel insurance as well as its international business.
Admiral has been investing heavily in expanding into different markets. It has a presence in Italy, France, Spain and the US, although this market has been a bit of a headache for the business.
The US motor insurance market is dominated by the big players, GEICO (owned by Warren Buffett’s Berkshire Hathaway), State Street and Progressive. With its Elephant Brand, Admiral can’t compete and has been losing money in the market, but its presence in the key European markets is far more significant.
In Italy, Admiral’s ConTe insures over one million vehicles, and its customer base grew by 15% in the first half of 2023. Overall, the group’s international business saw customer numbers increase 12% in the first half, with turnover rising 18%.
Back in the UK, the group saw a 14% increase in the number of home insurance customers and 70% increase in travel and pet customers year-on-year. Meanwhile, Admiral Loans, which has lent over £1bn in personal loans, reported a 31% increase in loan balances during the first half and a profit of £2.7m, its most substantial profit since the division started operating.
These are going to be the main growth drivers for the business going forward. But they’re not the only factors that’ll support the group’s growth. All insurers are benefiting from higher interest rates as the interest they own on their investment portfolios grows.
Admiral has around £4.1bn of investments to back up its underwriting. The whole balance is invested in bonds and cash and generated an underlying investment yield of 3% during the first half, up from 1.4% in the prior year period. That generated an extra £30.6m in investment income for the group. As the impact of the Bank of England’s tightening filters through the group’s investment portfolio, interest income will rise further, boosting Admiral’s bottom line.
Put all of the above together, and it looks as if Admiral is nearing an inflexion point. The combination of rising UK motor rates, growth in international markets, home insurance and its loan book, will likely have a meaningful impact on its top line and underwriting performance over the next few years. Meanwhile, rising interest rates will act as a tailwind for the group’s investment portfolio.
Of course, with insurers, there’s always going to be the risk that a relaxation in underwriting standards will lead to big losses, but Admiral has always been a leader in risk management, analysis and pricing adjustments. Plus, with a solvency ratio of 182%, and multiple reinsurance contracts, which distribute risk away from the group, the group is doing everything it can to reduce the risk of severe (and potentially terminal) losses.
With a fair wind behind it, analysts have the stock yielding 5.2% in 2024 with the potential for significant further growth throughout the rest of the decade.
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