After a rocky time of it, Admiral has set itself up for a smoother ride. The Welsh insurer is starting to feel the benefit of premium rises, which have improved profits that had been hampered by rampant claims inflation.
The Cardiff-based group has lifted premiums ahead of the broader market, up by about 20 per cent on new business and renewals over the first six months of the year. Pre-tax profits were 4 per cent higher, helped by increased returns on its balance sheet investments and reserve releases in its UK insurance business.
Higher prices also meant it lost customers in its core UK motor insurance business, where policy numbers declined 3 per cent. But the gap between the FTSE 100 insurer and the rest of the market has been narrowing, which means Admiral’s competitive position might start to look more appealing.
The motor insurance market has had a tumultuous three years. With more cars off the road during the pandemic, premium rates dropped sharply as claims declined. Claims inflation ensued post-lockdown, with the cost of second-hand cars, parts and labour rapidly increasing, and longer repair times. That led to painful underwriting losses last year. Pricing has been playing catch-up. Inflation is expected to ease during the second half of this year, although still coming in at 10 per cent over the full 12 months. That means premiums are also likely to be pushed higher.
The impact of raising prices has already started to feed through. Its overall combined operating ratio — a key measure of profitability where anything above 100 per cent indicates a loss — improved to 89.8 per cent in the first half of the year, compared with a loss-making 101.7 per cent over the course of last year.
Its core motor loss ratio, a measure of insurance claims as a proportion of premiums earned, improved to 92.7 per cent over the first six months of the year before any releases of capital held in reserve, better than the 97.8 per cent over the course of last year.
That is despite the drag from less profitable business written in previous years still lingering. There could be delayed gratification. The meaty price increases put through in the first half and later this year should improve profitability even further, as new policies increase within the mix. Admiral’s use of reinsurance has also positioned it to be more resilient against inflation than its motor-focused rivals. The insurer has form in achieving a far superior return on equity that stems from its co-insurance and reinsurance arrangements, where other firms underwrite a portion of the risk, freeing capital for use elsewhere. In the first half, that return stood at a healthy 39 per cent.
Under those reinsurance agreements, Admiral also gets a share of the benefit if the business written is profitable. Profit commission has also taken a hit due to business written at weaker margins in recent years. Again, higher rates should give this a boost.
That justifies the insurer’s premium valuation versus peers, which equates to just over seven times the book value forecast for the end of this year. In return, investors have been rewarded with a dividend that looks more secure than that offered by most rivals, a payment that analysts at Berenberg will amount to 113.7p a share this year.
There could be regulatory haze ahead. The Financial Conduct Authority’s consumer duty reforms present a risk, reckons brokerage Jefferies, given the chunky contribution that instalment income and ancillary products make to Admiral’s pre-tax profit. But the pricing/inflation dynamics could put Admiral on course for earnings upgrades later this year.
ADVICE Buy
WHY Premium rises should feed through to stronger profitability this year
Balfour Beatty
Investors are braced for a wrecking ball to rip through Balfour Beatty’s bottom line. US office developers are more reluctant to push the button on projects, a consequence of higher inflation and heavier financing costs. For the FTSE 250 construction specialist, it meant a 12 per cent contraction in the US order book.
Investors are cautiously positioned, which is reflected in a forward earnings multiple of just under nine times on Balfour Beatty’s shares, within touching distance of the ten-year low plumbed in the pandemic.
Given the construction sector’s chequered past, it’s not hard to spook the market. There are several reasons for investors having more faith that the group can ride out a shakier trading backdrop. One is a rock-solid balance sheet, with net cash of £710 million at the end of June, equivalent to 41 per cent of its £1.73 billion market cap.
That’s enough cushioning even without taking into account it also has about £1.3 billion of infrastructure investments, including in student housing. The sad state of markets this year meant no disposals were made in the first half, although it is hoping to offload some assets in the coming months.
Analysts at Numis forecast that interest on its weighty cash balance will amount to £30 million this year.
The capital at its disposal has been enough to comfortably fund £600 million in share buybacks since 2021 and decent dividends, which analysts think will total 11p a share this year. That would leave the shares offering a potential yield of 3.5 per cent at the current price, even if analysts at Jefferies don’t think the £150 million share buyback will be repeated next year.
Recovery in the US construction market is not anticipated this year, but this accounts for 26 per cent of underlying profit. The UK construction division contributes almost half, with higher volumes of work helping to push the margin to 2 per cent over the first half, from 1.5 per cent in the same period last year. Easing inflation could provide another boost. Balfour Beatty deserves some more slack.
ADVICE Buy
WHY The shares look too cheap given the solid balance sheet and margin progress in the UK
