Admiral @ 1017p, -27p (-2.59%).
I have been very tempted in the past to invest in Admiral.
Again after their last couple of disappointing quarterly trading statements, and more recently following Credit Suisse's upgrade to outperform (http://www.sharecast.com: Broker snap: Credit Suisse upgrades Admiral to outperform) ahead of tomorrow's final results.
I have been very tempted in the past to invest in Admiral.
Again after their last couple of disappointing quarterly trading statements, and more recently following Credit Suisse's upgrade to outperform (http://www.sharecast.com: Broker snap: Credit Suisse upgrades Admiral to outperform) ahead of tomorrow's final results.
But, with the share price having appreciated already from their recent lows it looks too much of a gamble given the 50/50 chance of the results being well received or not.
Historically the company seems well run and the 2 founder/directors retain large stakes in the company so seem well motivated by the healthy dividend.
It has good cashflow which at 79.04p per share exceeds earnings per share (as you would expect from an upfront premium business) but has seen its premium prospect rating tarnished somewhat by a proposed investigation of referral fees and, in the last 2 quarterly statements, a worsening trend in personal injury claims which is hugely ironic given that we all seem to be paying for that trend.
So although the company has continued to increase cash balances (2010: £246.70m) there is this perceived threat to future profitability as margins on premiums are eroded.
This seems to be what the company refers to as reserve releases which have been reducing as its loss ratio increases.
My interpretation (rightly or wrongly) would be that an estimated margin on premiums received is placed in reserve (against claims) and then adjusted prior to a proportion being released into profits. The adjustment being for the loss ratio on claims which is the actual cost to the company of accident losses.
"...the reported loss ratio for H1 2011 was
76% v 66% in H1 2010. The UK market loss ratio for the 2010 accident year (the most recent
data available) was 92%. Our loss ratios remain significantly lower than the market."
So the loss ratio could still be below the markets 92% (I assume that's an average) but having increased by 10% already might well worsen further and closer to the average.
This seems to be what the company refers to as reserve releases which have been reducing as its loss ratio increases.
My interpretation (rightly or wrongly) would be that an estimated margin on premiums received is placed in reserve (against claims) and then adjusted prior to a proportion being released into profits. The adjustment being for the loss ratio on claims which is the actual cost to the company of accident losses.
"...the reported loss ratio for H1 2011 was
76% v 66% in H1 2010. The UK market loss ratio for the 2010 accident year (the most recent
data available) was 92%. Our loss ratios remain significantly lower than the market."
So the loss ratio could still be below the markets 92% (I assume that's an average) but having increased by 10% already might well worsen further and closer to the average.
Picking the following from the interim statement;
"Outlook
... However, consistent with the trend reported in H1 2011, the frequency and expected cost of new large personal injury claims has remained above historical levels of experience. This leads us currently to expect some adverse development at the full year on the projected ultimate loss ratios for 2010 and 2011 which would affect both overall reserve movements and recognised profit commission.
If there is no reversal in Q4 of this higher than normal level of large claims, we anticipate that full year pre-tax profits will be towards the lower end of the range of analysts’ estimates, or some 10% ahead of 2010, with no further reserve releases in the second half."
... However, consistent with the trend reported in H1 2011, the frequency and expected cost of new large personal injury claims has remained above historical levels of experience. This leads us currently to expect some adverse development at the full year on the projected ultimate loss ratios for 2010 and 2011 which would affect both overall reserve movements and recognised profit commission.
If there is no reversal in Q4 of this higher than normal level of large claims, we anticipate that full year pre-tax profits will be towards the lower end of the range of analysts’ estimates, or some 10% ahead of 2010, with no further reserve releases in the second half."
So although 10% would still represent record results and be in the range of suggested expectations by the company I think it more important for the company to demonstrate that the trend in personal injury claims once again falls back to historical levels.
Anything else would obviously be a concern on a number of levels as the company would then need to find a means of increasing premiums to restore its profitability.
This might be difficult in the short term, makes the company less competitive with its rivals and suggests a worsening trend to us all as motor insurance customers.
Can't find enough clues (other than the Credit Suisse comments) to suggest that the company might be ready to report that this trend has been brought under control.
So despite the prospect of a chunky dividend, I find myself still not ready to invest in Admiral until the picture becomes clearer.
I might miss the boat again but don't feel I am lucky enough to take on the 50/50 chance of a painful short term hit.
Can't find enough clues (other than the Credit Suisse comments) to suggest that the company might be ready to report that this trend has been brought under control.
"The key focus of the result will be on bodily injury, where the content and tone of management commentary may cause volatility (in both directions)," analysts said (Sharecast).
I read that as hedging their bets then.
If it doesn't report positively then the shares could well fall back again until the industry's collective premiums catch up with increasing liabilities.
It could well be that after having been trading for x number of years and achieved the level of growth in client numbers that it has. It now has an underlying level of risk expense from its targeted demographic that it hadn't fully envisaged and must now absorb.
So despite the prospect of a chunky dividend, I find myself still not ready to invest in Admiral until the picture becomes clearer.
I might miss the boat again but don't feel I am lucky enough to take on the 50/50 chance of a painful short term hit.
Related links:
- http://www.admiralgroup.co.uk/pdf/annualreports/2011_interim_statement_nov.pdf
