As the insurer issues a profit warning, we look at the reasons why, and what the implications are for Admiral’s future financials
How bad is it going to get for Admiral? That’s the question on investors’ lips today after the Cardiff-based motor insurer issued a profits warning.
The concern is that Admiral is being hit by the 2010-11 bodily injury claims at a time when its gross written premium doubled from £847.7m in 2009 to £1.94bn in 2011.
Admiral is being hit especially hard by large claims (see chart, below).
Knock-on effects
The primary consequence of all this is that Admiral will have to beef up reserves for the 2010 and 2011 years. That will mean lower earnings expectations in 2011, 2012 and 2013 than the City had previously forecasted. Dividend expectations are also likely to be lower.
Jefferies analyst James Shuck says: “The gap between booked reserves and ultimate losses at H1 was two percentage points in 2010 and 13 percentage points in 2011.
“Although Admiral hasn’t yet given an indication of new ultimate losses, we think that around two percentage points of additions are needed for 2010, with nine percentage points of releases available for 2011. Even though there is some redundancy for 2011, this is uncertain and volatile, with Admiral likely to take longer than previously expected to release this into earnings.
“The main implication for this is on the profit commission. This is tricky to model accurately, but our early work indicates a need to lower earnings estimates by 13%-17% for 2011-13 earnings.”
Another effect is that Admiral is raising rates faster than the rest of the market. That should give an opportunity for rivals such as RBSI to grab back customers (see chart, below)
An even keel
Overall, putting Admiral’s challenges into perspective, it still seems unlikely that the insurer will suffer a pre-tax loss for the years 2012 and 2013.
It still has an expense base advantage over rivals, can leverage its own price comparison site in Confused, and even though its rates are rising faster than the market, it still remains competitive (see chart, below).
It is worth remembering, too, that RBSI posted a £295m loss last year, while Equity Red Star underwent more than £400m in reserve strengthening. RBSI has a rich bank as its parent and Equity is backed by the deep pockets of parent Insurance Australia Group.
Admiral, for all its challenges, is still some way off those levels of deterioration.
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