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Admiral - 2022 impacted by an increase in claims and costs

Admiral reported group revenue of 3.7bn pounds, up 5%.

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Admiral reported group revenue of £3.7bn, up 5%. That was helped by an 11% increase in customer numbers to 9.28m. Within that, net premiums rose 6.5% to £911m.

Profit before tax fell 39% to £469m, a bigger drop than analysts were expecting, mainly due to increased claims and the cost of servicing those claims. In response to higher costs, prices were increased "significantly" in the UK and the US. The group's combined ratio, a measure of insurance profitability, rose to 101.7% (2021: 85.2%) - anything over 100% suggests underwriting was loss-making over the period.

Free cash flow rose from £175m to £367m. The solvency ratio, a measure of balance sheet strength, decreased from 195% to 180%. Surplus capital sits at £540m over the regulatory requirement.

The Board has proposed a final dividend of 52.0p, which includes an ordinary dividend of 37.5p and a special dividend of 14.5p. That equates to a full year dividend of 112p, down 40%.

The shares fell 7.2% in early trading.

View the latest Admiral share price and how to deal

Our view

It's safe to say markets were unimpressed by Admiral's full-year results, which saw profit miss analyst expectations. Higher claims and an increase in the cost of servicing them weighed on performance, though that was already priced in to some degree. What spooked markets was the performance of the international business, which management described as having "very low" average premiums, specifically from Italy and Spain.

UK motor insurance is the largest division, accounting for around two-thirds of turnover. To combat the rising cost of servicing claims, prices have been hiked by mid-single digits since the start of 2023 and are expected to keep rising - a trend we see across other divisions. It's a balancing act, though, as price is typically the key differentiator from a customer's standpoint, and price actions fed through to a decline in motor customers over the year.

Admiral has another ace up its sleeve. The business model relies heavily on reinsurance, where an insurer passes on insurance business to a third party who takes on the liability. This is a fairly common practice and allows insurance companies to build their brand by taking on all manner of customers but only being on the hook for risks they want.

In 2022, Admiral passed on 66% of its gross insurance premiums to third parties. Relationships with reinsurers are key, and Admiral leverages its strong partners to pass on around double the industry average. That allows Admiral to be selective on its risks while taking on more customers overall. That helps build the brand and funnels more data to the group's bespoke machine learning tools, which help assess risk. It's a recipe that's helped deliver market-leading performance; there's no guarantee it will continue.

Admiral also goes directly to the consumer, unlike competitors who sometimes use a third party to engage with clients. It's a model that helps leverage the analytics capabilities further, as there's no dilution to the data it collects on policyholders. Better data leads to better risk-based decisions, allowing Admiral to favour higher-risk, higher-priced policies.

Challenges ahead include getting the US and European insurance divisions back into profitable territory. If management's taken at their word, things should improve over 2023 - we'd err on the side of caution.

Dividend growth from here looks attainable, but it's worth remembering the payout ratio is expected to be 90-95% of earnings - so if earnings surprise on the downside return levels are by no means guaranteed. Nonetheless, we think Admiral has several competitive advantages over many of its peers, from bespoke data analytics to strong relationships with reinsurers. No doubt current conditions are tricky, but we support the long-term prospects at current valuations. Of course, there are no guarantees.

Admiral key facts

All figures are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 8th March 2023