2023-05-20 05:26:04 ET
Summary
- Admiral operates a very strong UK motor insurance business. Earnings were hit last year on rising claims frequency and severity.
- 2022 could mark a bottom, with the motor insurance environment improving alongside some of Admiral's other lines like Household.
- On a 90% dividend payout ratio, that means the dividend should show modest growth this year. The base yield is already 5%.
- These shares offer attractive dividend growth potential, which Admiral can achieve on low-single-digit annualized market growth and continued share gains.
2022 was a difficult year for British non-life insurer Admiral (AMIGY)(AMIGF). Domestic motor insurance makes up the lion's share of its business, and between normalizing claims frequency post-COVID and an inflation-driven rise in claims severity, the macro environment posed a severe headwind to underwriting profitability.
Admiral Group Share Price (Pence Per Share)
As a result, Admiral shares are down around 30% since the start of last year (improving to around a negative 20% total return inclusive of dividends), notwithstanding a strong bounce off their mid-2022 lows. The ADSs have performed notably worse on account of GBP weakness versus the dollar.
Although the macro environment has proved challenging, the worst is probably in the rearview mirror. With Admiral historically posting exceptional growth and profitability numbers now is a good time to consider the investment case here.
Historically Impressive Performance
Save for perhaps niche lines, insurance can be a very difficult place to carve out a competitive advantage. Admiral's business skews heavily to motor insurance - UK motor turnover was £2.493B last year, or two-thirds of the group total - so you would expect that statement to apply here too.
Instead, Admiral has recorded a very fine history of underwriting profitability. Pre-COVID (chosen as 2020 and 2021 were artificially good years for UK car insurers), Admiral's combined ratio in UK motor was around 83%. That averages over 10ppt better than the figure posted by recently covered peer Direct Line Group (DIISY)(DIISF) over the same period.
Admiral Group v Direct Line Group: Combined Ratios In UK Motor
What's more, Admiral has achieved this superior level of profitability while also experiencing strong growth in UK motor customers. Over the period in question, Admiral grew its UK vehicles insured from 3.15 million (2014) to 4.37 million (2019), and that has since increased to 4.94 million as of 2022. Motor insurance customers typically discriminate on price, so to be able to grow its customer base so rapidly while generating attractive levels of underwriting profitability is impressive.
Admiral Group: UK Motor Vehicles Insured At Year End
2022 Was A Relatively Tough Year
Last year was a tough one for UK car insurers. Normalizing traffic post-COVID meant that claims frequency also increased back to more normal levels, while inflation meant that claims severity also increased sharply. At 71.5%, Admiral's reported loss ratio was 10.8ppt higher than pre-COVID 2019, with its reported Motor combined ratio of 93.3% around 13.5ppt higher than in 2019.
UK Motor Insurance profit before tax ("PBT") did fall sharply year-on-year, from £871.7m to £622.7m, although as mentioned in the previous section this was due to an incredibly strong 2021, when COVID restrictions artificially lowered the motor loss ratio. UK motor PBT was actually up 5% on the more "normal" 2019 despite a sharp deterioration in its combined ratio.
Vehicles insured fell 0.03m last year on a period-end basis (to 4.94m), which on the face of it looks concerning as this was the first annual fall in a decade. I would note, however, that this was in the face of significant price increases over the year, and so actually represents a very resilient performance given how price-sensitive motor insurance customers are.
Admiral's other business lines were a significant drag on 2022 group PBT, which at £469m was 7% lower compared to 2019. These include other lines of domestic non-life insurance (Household and Travel & Pet), International Insurance (European & US motor insurance) and unsecured personal lending (Admiral Money). Non-motor UK insurance profit suffered due to 2022 being a very bad year for weather-related claims, and that drove a £6.3m pre-tax loss in Household (2021 PBT: £21.3m). International Insurance losses widened for much the same reason as the weaker UK Motor performance (i.e. higher claims inflation resulting in a higher loss ratio). Admiral Money was stronger, though, reporting a PBT of £2.1m (versus a loss of £5.5m in 2021) on the back of higher net interest income.
Earnings Should Improve In 2023
2022 should mark a bottom in terms of earnings. In the UK, management expects better conditions for both motor (pricing catching up with inflation) and household (a more normal year for weather):
And finally, for 2023, we expect a better outlook for both household and motor.
Cristina Nestares, CEO UK Insurance, FY 2022 Earnings Call
I expect the same reasoning to lead to improvements in the international motor business, though my view is that these should ultimately be sold (along with Admiral Money) as these businesses are unlikely to generate attractive long-term returns, certainly compared to domestic motors. Regardless, this implies that 2022 should mark a low point for group earnings.
At £22.51 in London trading, Admiral shares trade on a P/E of 18.1x 2022 EPS (124.3 pence). This appears high for what is principally a UK motor insurer, but note that Admiral has averaged a return on equity over around 50%, and that in turn supports a dividend payout ratio of 90%. The FY 2022 dividend (112 pence per share) corresponds to a yield of 5%.
Admiral Group: Return On Equity
A 90% dividend payout ratio remains management's guidance, so assuming 2022 marks a bottom in EPS, investors can expect modest dividend growth in FY 2023. With that, I estimate FY 2023 PBT to land at around £500m, leading to EPS of circa 129 pence. That, in turn, implies a DPS of at least 116 pence. I see Group PBT and EPS rising to £575m and 140 pence, respectively, in FY 2024, implying an FY 2024 DPS of at least 126 pence, which I think Admiral can grow by mid-single-digits per annum thereafter on a combination of continued market share gains and low-single-digit UK market growth. Buy.
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Admiral Group: 2022 Could Mark A Bottom