Shares in car and home insurance group Admiral (ADM) raced ahead in early trading with a gain of 7.8% to £23.70 despite the firm cutting its interim dividend due to ‘continued challenging market conditions’.

Sensing conditions in the car insurance market may be changing for the better, investors also chased up shares in rival Direct Line (DLG) sending them 7.2% higher to 162p.

ACCENTUATING THE POSITIVE

For the six months to June the company posted a 14% increase in insurance revenue, mostly thanks to price hikes last year and this year which it admitted were ‘well ahead of the market’.

Group customer numbers increased 4% from 9.05 million to 9.41 million, with next to no growth in the UK but a 12% increase in the international customer base to 2.21 million.

First-half pre-tax profit was 4% higher at £234 million, but behind that UK motor insurance profit was £298 due to the ‘positive development of prior-year claims’ (ie paying out less than the company thought) and higher income from its investment portfolio thanks to higher interest rates.

The reason for the difference between UK motor profit and the group profit is £65 million of negative ‘other group items’.

These include £22.7 million of costs for employee share schemes, £15.2 million of ‘other group costs’ such as for the implementation of the new IFRS 17 accounting standard, £12.7 million of write-offs for its Pioneer new product business due to massive claims in its Veygo start-up and another £15 million or so of business development costs and interest costs.

The core motor loss ratio was broadly flat at 65.8% during the half, with claims inflation running at about 10% due to increases in the cost of replacement parts and paint as well as high labour costs and parts shortages, which have led to longer repair times.

Yet investors were clearly swayed by chief executive Milena Mondini de Focatiis’s upbeat commentary on the results and the outlook, in particular the suggestion that the cycle is turning.

‘Inflation persists, but we have navigated the cycle well, maintaining pricing discipline and a focus on medium-term profitability. We recognise that these are challenging times for many people. We now serve even more customers and are very well-positioned for a more encouraging outlook.’

DIVIDENDS HALVED FROM 2022

Being disciplined on pricing means the firm also has to be disciplined with its capital allocation, including shareholder returns.

The board declared a first-half dividend of 51p per share compared with 60p per share last year plus the 45p special dividend, so actually this year’s interim payment is down more than 50% on 2022 rather than 15% as stated.

Moreover, as the firm has a policy of only paying out 65% of net profits, the ordinary dividend is just 38p per share with the remaining 13p described as a ‘special’ dividend.

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