The Admiral (LSE:ADM) share price jumped 5% on Wednesday morning after the company reported strong earnings for the first half of 2023. But is there more to come?
I think the stock is one of the best FTSE 100 insurance companies for investors to potentially own. I see its strong results as evidence of this, and it’s on my list of shares I’m looking to buy.
Results
Overall, revenues were up 21%, pre-tax profits grew by 4%, and earnings per share were down by 5%. But what really caught my eye was the performance in the company’s UK insurance operations.
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Companies like Admiral generate income from two sources. The first is by underwriting policies and the second is by investing the premiums they receive from customers.
At first sight, Admiral’s UK results (which is where all of its profits come from) look somewhat mixed. While investment income grew by £30m, underwriting profits fell by £9m.
The gain in investment income is good, but it’s what I would have expected from the company. With interest rates rising, it should be able to earn a better return on the cash it invests.
In my view, the real key is its underwriting performance. This is where I think the company has demonstrated some real strength recently.
Underwriting
A £9m decline might seem like a disappointment, but things have been tough for car insurance companies in the UK this year.
The dominant theme of 2023 in the UK so far has been inflation, which is especially challenging for insurers. Higher prices make claims more expensive to settle, cutting into profitability.
As a result, I view a 4% decline in underwriting income as a solid result. To me, it shows the company is writing in a way that allows it to remain profitable even in a difficult environment.
Another illustration of this comes from looking at the ‘combined ratio’. This is one of the most important metrics when it comes to assessing insurance companies.
The combined ratio measures underwriting profitability by calculating costs and claims as a percentage of premiums received. So a lower number is better and 100 is break even.
Admiral’s combined ratio increased from 87% to 89%. That’s a step in the wrong direction, but also a figure that represents solid profitability for the company.
A stock to consider buying
I see Admiral as one of the best UK insurance stocks on the market. And I think the earnings report bears out this view.
It’s only natural for companies to go through ups and downs as the macroeconomic environment changes. What distinguishes the best, in my view, is how they cope when things are tough.
Admiral’s performance demonstrates a resilience in the underlying business. It’s not immune from the effects of inflation, but it is able to handle them better than most of its competitors.
For some time, the company has managed to keep its combined ratio below the industry average. That indicates it has a durable competitive advantage, solidifying its place on my buy list.
