Admiral COR jumps eight points after ‘disappointing’ 2011

Admiral’s 2011 UK motor combined ratio jumped 7.8 points to 91.3% (2010: 83.5%) because of bodily injury claims inflation.

However, the company’s UK motor book’s pre-tax profit increased 14% to £313.6m (2010: £275.8m) as total written premium jumped 40% to £1.7bn (2010: £1.2bn).

The group’s profit before tax increased 13% to £299m (2010: £266m), while the combined ratio increased six points to 95.7% (2010: 89.3%).

Admiral’s stock was up 12% to £11.61 in morning trading on the back of the results.

Higher-than-expected bodily injury claims from business written in 2009, 2010 and 2011 cut Admiral’s 2011 reserve releases in half to £10.3m (2010: £23.5m).

‘Disappointing’

Despite the effects of bodily injury claims on Admiral’s results, chairman Alastair Lyons insisted that the challenges were not down to poor reserving at the company. “It is important to underline that this did not result from inadequate booked reserves on prior years, but from a higher-than-anticipated projected cost of bodily injury claims on a part of the business written during our recent rapid growth,” he said.

Admiral chief executive Henry Engelhardt praised the increase in profit and turnover, but added: “Profits are up 13%, and in most situations you’d call this a giant winner. But this is less than most people thought they would be. Far less than I thought they would be, that’s for sure. It has been a disappointing year. Not because it was a bad year, but because so much more was expected.”

Profit warning

Admiral issued a profit warning in November last year, saying 2011 profits would only be 10% higher than the previous year’s, putting them below analysts’ expectations. It also said there would be no reserve releases during the second half of the year.

However, the company only released £4m of reserves in the first half, indicating that it was able to release £6.3m in the second half, and the 13% group profit rise was above that predicted in the warning.

“We enter 2012 with confidence,” Engelhardt said. “We can continue to grow profitably and have a business full of committed and motivated people who work hard every day to ensure Admiral’s continued success well into the future.”

Shore Capital analyst Eamonn Flanagan said Admiral’s results were broadly in line with the guidance it had given in November. However, he maintains his ‘sell’ recommendation on Admiral because its share price is trading 11.5 times Shore’s 2012 earnings estimates.

“We believe that the rating continues to overlook the risks to Admiral’s business model from the various inquiries, such as the OFT investigation of the credit hire industry, and the risk of further deterioration of its bodily injury experience,” Flanagan said.

Greater volatility

Admiral’s UK motor underwriting profit dropped to £47m in 2011 from £52.7m in 2010. As a result of the lower profitability of the business, Admiral’s profit commission on UK motor business dropped 8% to £61.8m (2010: £67m).

The company warned that because of changes to the profit commission agreements with its panel of reinsurers, small moves in combined ratio will exert a large influence on its profits.

“Simply put, the problem is that we’ve increased our volatility by increasing our profit commissions,” Engelhardt said. “So if our combined ratio moves up or down just a couple of points, it adds or subtracts tens of millions from our bottom line. This was not the case in years past because we didn’t get as much of the profits. So there’s a penalty to pay for greater profits: greater volatility.”

Admiral will only keep 25% of the UK motor business it writes in 2012 (2011: 27.5%), ceding the rest to its panel of reinsurers.

Confused.com

While the UK motor business profit increased, profits at Admiral’s price comparison business, Confused.com, fell again: this time to £16.1m from £16.9m. Admiral chief operating officer David Stevens said: “This was a strong achievement in a market that has become yet more competitive, with ever higher amounts spent on media by the main competitors.”

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