Admiral Group plc (LON:ADM) today announced its results for the six months ended 30 June 2019.
|30 June 2019||30 June 2018||% change|
|Group’s share of profit before tax*1||£220 million||£212 million||+4%|
|Group statutory profit before tax||£218 million||£211 million||+4%|
|Earnings per share||63.0 pence||61.6 pence||+2%|
|Interim dividend||63.0p/per share||60.0p/per share||+5%|
|Return on equity*1||47%||54%||-13%|
|Group turnover*1||£1.76 billion||£1.66 billion||+6%|
|Group net revenue||£0.65 billion||£0.60 billion||+8%|
|Group customers*1||6.74 million||6.23 million||+8%|
|UK Insurance customers*1||5.32 million||5.07 million||+5%|
|International Car Insurance customers*1||1.36 million||1.12 million||+21%|
|Group’s share of Comparison profit*1||£7.4 million||£3.5 million||+111%|
|Statutory Comparison profit||£5.4 million||£2.6 million||+108%|
|Solvency ratio (post dividend)||190%||196%|
*1Alternative Performance Measures – refer to the end of the report for definition and explanation.
Around 10,000 staff receive free shares worth up to £1,800 under the employee share scheme based on the interim 2019 results.
Comment from David Stevens, Group Chief Executive Officer
If it’s a can’t-put-down, read-in-one-go page-turner that you’re after, then I’m afraid our half-year results don’t fit the bill. Frankly, they are a bit dull. Turnover up mid-single digits, profit up low-single digits. Hardly “hold the front page”.
However, for dedicated aficionados who look behind the headlines, there’s some reward for reading on. Profit growth, even if modest, is more exciting considering the £33 million Ogden headwind. Low growth in UK Motor policy count reflects a consciously reduced competitiveness, as we price rationally in the face of any rising claims costs across the market as a whole.
And potentially lost amidst the worthy tome that is the UK, there’s the racier continental novella that is the European insurance business which has delivered another profitable half year whilst adding a record 209,000 customers over the last year (and 125,000 over the last six months alone).
Plus, there’s a chapter devoted to Admiral’s emerging Loans business – not the fully finished article, but an encouraging debut from a young talent.
The Board has declared an interim dividend of 63.0 pence, representing a normal dividend of 41.8 pence per share and a special dividend of 21.2 pence per share. The dividend will be paid on 4 October 2019. The ex-dividend date is 5 September 2019 and the record date is 6 September 2019.
Analysts and investors will be able to access the Admiral Group management presentation which commences at 9.00 BST on Wednesday 14 August 2019 by registering at the following link https://pres.admiralgroup.co.uk/admiral036/vip_connect. A copy of the presentation slides will be available at www.admiralgroup.co.uk
H1 2019 Group overview
|Net other revenue and expenses*1||80.1||93.3||92.3||183.1|
|Group statutory profit before tax||193.4||210.7||218.2||476.2|
|Group’s share of profit before tax||194.5||211.7||220.2||479.3|
|Analysis of profit:|
|Group’s share of profit before tax*1||194.5||211.7||220.2||479.3|
|Group loss ratio*1*2||68.0%||65.2%||69.1%||67.3%|
|Group expense ratio*1*2||22.0%||22.2%||23.2%||22.9%|
|Group combined ratio*1||90.0%||87.4%||92.3%||90.2%|
|Customer numbers (million) *1||5.46||6.23||6.74||6.51|
|Earnings per share||57.3 p||61.6 p||63.0 p||137.1 p|
|Dividends||56.0 p||60.0 p||63.0 p||126.0 p|
|Return on Equity*1||55%||54%||47%||56%|
*1 Alternative Performance Measures – refer to the end of the report for definition and explanation.
*2 See notes 13b and 13c for a reconciliation of reported loss and expense ratios to the financial statements.
Key highlights for the Group results in H1 2019 include:
- Continued growth with turnover up 6% to £1.76 billion (H1 2018: £1.66 billion) and customer numbers 8% higher at 6.74 million (30 June 2018: 6.23 million)
- Group share of pre-tax profits of £220.2 million (H1 2018: £211.7 million) and statutory profit before tax of £218.2 million (H1 2018: £210.7 million) both growing by 4%
- UK Insurance recorded modest growth in turnover to £1.34 billion (H1 2018: £1.32 billion) with customer numbers reaching 5.32 million (30 June 2018: 5.07 million)
- Significant underlying profit growth (before Ogden rate impact) of £41.0 million in UK Insurance, primarily attributable to favourable development in prior year loss ratios for UK Motor. Profit growth including the Ogden rate impact is £7.7 million
- The adverse impact of the recent announcement of the new Ogden rate of minus 0.25% on the H1 2019 result is £33.3 million. Refer to the UK Motor Insurance section below for further detail
- UK Household result improved in H1 2019 to a profit of £4.2 million (H1 2018: loss of £1.9 million) with more benign weather experience compared to the prior period
- Losses in International Insurance businesses totalled £2.7 million (£0.6 million loss in H1 2018), with continued profit in the European operations offset by higher claims costs in the US
- Combined International insurance turnover grew strongly by 23% to £319.5 million (H1 2018: £260.1 million) and customer numbers by 21% to 1.36 million (30 June 2018: 1.12 million)
- The Comparison result improved by £3.9 million to £7.4 million, with notably higher profits from Confused.com of £8.7 million (H1 2018: £5.8 million) in addition to growth in European profits and lower losses from compare.com.
Earnings per share
Earnings per share is 2% higher than in H1 2018 at 63.0 pence (H1 2018: 61.6 pence), broadly consistent with the growth in pre-tax profit. The adverse Ogden impact reduced earnings per share by 10.0 pence.
Dividends and solvency
The Group’s dividend policy is to pay 65% of post-tax profits as a normal dividend and to pay a further special dividend comprising earnings not required to be held in the Group for solvency or buffers.
The Board has declared a total interim dividend of 63.0 pence per share (approximately £180 million), split as follows:
- 41.8 pence per share normal dividend, based on the dividend policy of distributing 65% of post-tax profits; plus
- A special dividend of 21.2 pence per share
The total 2019 interim dividend is 5% ahead of the 2018 interim dividend (60.0 pence per share), with a pay-out ratio of 100% of Earnings per share. The 100% payout is higher than usual and is a result of the Group’s strong capital position at 30 June 2019. The payment date is 4 October 2019, ex-dividend date 5 September 2019 and record date 6 September 2019.
The Group maintained a strong solvency ratio at 190% (post-dividend), which has reduced from 194% at 31 December 2018. Both Own Funds and the SCR increased in the period, with the SCR increase reflecting the one-off change in treatment resulting from the implementation of IFRS 16, the new leases accounting standard, and an increase in the capital requirement for the Loans business.
The Group’s results are presented in the following sections:
- UK Insurance – including UK Motor (Car and Van), Household and Travel
- International Car Insurance – including L’olivier (France), Admiral Seguros (Spain), ConTe (Italy), and Elephant (US)
- Comparison – including Confused.com (UK), LeLynx (France), Rastreator (Spain), compare.com (US), and Preminen (new markets)
Highlights for the UK insurance business for H1 2019 include:
- Modest growth in Motor resulting from Admiral’s premium rates moving up ahead of the wider market (recent indicators point to evidence of market rates rising)
- Continued strong growth in Household, with customers 18% higher than one year ago at 0.92 million (30 June 2018: 0.78 million)
- An increase in UK Motor profit to £251.7 million, including an adverse impact of £33.3 million arising from the change in the Ogden rate to minus 0.25% (0% best estimate assumption at 31 December 2018), with significant favourable development in prior year loss ratios
- Household profit of £4.2 million (H1 2018: £1.9 million loss), with lesser impact of weather events compared to H1 2018 and positive development on prior year claims.
UK Motor profit was broadly flat for the first six months of 2019 at £251.7 million (H1 2018: £249.5 million). Whilst the reported combined ratio rose to 86.5% (H1 2018: 78.2%), this was offset by a higher level of claims reserve releases from commuted reinsurance and profit commission. Net other revenue was also broadly consistent with the prior period, though includes a number of offsetting movements.
Highlights for the period were as follows:
- Net insurance premium revenue was just under 2% higher than H1 2018 at £225.4 million (H1 2018: £221.1 million), mainly resulting from the larger portfolio
- Investment income was £15.9 million, in line with H1 2018
- The Ogden discount rate changed to minus 0.25% (best estimate assumption of 0% at 31 December 2018) reducing the UK Motor profit by £33.3 million, and increasing the reported combined ratio by almost 7% points
- Excluding the impact of the Ogden rate change, the underlying current period loss ratio was just over 2% points higher than H1 2018. Whilst large bodily injury experience improved in H1 2019 compared to 2018 (full year), Admiral continued to experience claims inflation at a similar overall level to the market. The Group continues to reflect a cautious approach in setting reserves early in their development
- Reserve releases on original net share of reserves of £50.0 million (H1 2018: £56.5 million), equating to 22% of premium (H1 2018: 26%). Excluding the impact of the Ogden change, releases would have been 1.5% points higher than H1 2018 (27% of premium; £61.0 million) following favourable development of prior year claims
- The written basis expense ratio is consistent with 2018, at 17.5%. There are a number of underlying factors that influence the net reported expense ratio, including the split of expenses between acquisition and non-acquisition and the impact of reinsurance expense commissions. The increase in the period relates to higher non-acquisition cost, including higher levies which is partially offset by a lower acquisition cost.
- Releases on reserves originally reinsured but since commuted higher at £52.8 million (v £35.2 million in H1 2018). Excluding the impact of the Ogden change, the variance is larger (£61.9 million, increased by £26.7 million), primarily as a result of a lower negative impact of commutation (H1 2019: £4.9 million, H1 2018: £31.9 million)
- Underlying profit commission (excluding the Ogden impact) was also higher at £43.9 million (H1 2018: £30.8 million)
- Both releases from commuted reinsurance and profit commission are discussed in more detail in the Co- and reinsurance section below
- Other revenue (including ancillary products underwritten by Admiral) and instalment income remained relatively flat (£117.7 million v £119.8 million in H1 2018).
There is some evidence that Motor market rates have increased modestly in the latter part of H1 2019, with pressure from claims inflation likely being a driver. Over the last 12 months, Admiral has increased its rates ahead of the market, prioritising margin over growth. Turnover increased marginally to £1.26 billion (H1 2018: £1.25 billion) whilst net revenue rose 2% to £436.1 million (H1 2018: £425.9 million). The number of vehicles insured increased by 2% to 4.33 million (30 June 2018: 4.26 million).
Claims and reserves
Notable claims trends for the market in the first half of 2019 include slightly higher overall frequency, a flattening out in injury claims frequency and continuing elevated levels of damage claims costs primarily as a result of advances in technology. Admiral experienced similar overall claims inflation to the market. Large bodily injury claims experience (in terms of frequency and total cost) for Admiral was more favourable in H1 2019 than in 2018.
The Group continues to reserve conservatively, setting claims reserves in the financial statements significantly above actuarial best estimates to create a margin held to allow for unforeseen adverse development.
As noted above, the Group experienced continued positive development of claims costs on previous accident years and this led to another significant release of reserves in the financial statements in the period (£50.0 million on Admiral’s original net share net of the adverse impact of Ogden, H1 2018: £56.5 million). The margin held in reserves remains prudent and at a consistent level to 31 December 2018.
Change in UK discount rate (‘Ogden’)
Following the recent announcement by the UK Government, the Ogden discount rate which is used in setting personal injury compensation, was changed to minus 0.25% from the existing minus 0.75% rate that had been in place since February 2017. The change came into effect on 5 August 2019 and the minus 0.25% rate is likely to remain in place for the next five years.
The minus 0.25% rate is 25 basis points lower than the assumed rate of 0% that was used in setting best estimate claims reserves at 31 December 2018.
The total impact of the new Ogden rate on profit is expected to be approximately £50-60 million. The current period impact on profit is £33.3 million and is shown through higher claims incurred and lower profit commission. The remaining amount is expected to flow through in future periods through recognition of unearned premium and lower profit commission.
Co- and reinsurance, commutations and profit commission
Admiral makes significant use of proportional risk sharing agreements, where insurers outside the Group underwrite a majority of the risk generated, either through co-insurance or quota share reinsurance contracts. The Group’s net retained share of that business is 22%. These arrangements include profit commission terms which allow Admiral to retain a significant portion of the profit generated. The proportional co- and reinsurance arrangements in place for the motor business are the same as those reported in the 2018 Annual Report and will continue into 2020.
Admiral Group plc tends to commute its UK Car Insurance quota share reinsurance contracts for an underwriting year 24 months from inception, assuming there is sufficient confidence in the profitability of the business covered by the reinsurance contract.
As at 30 June 2019, all UK car quota share reinsurance contracts for underwriting years up to and including 2016 have been commuted, along with the majority of contracts for the 2017 underwriting year, meaning Admiral assumes a higher net risk for these years than had the reinsurance been left in place. The 2016 contracts and the remainder of the 2015 contracts were commuted during H1 2018. The majority of the contracts relating to the 2017 underwriting year were commuted in H1 2019.
In H1 2019 profit commission of £35.0 million was recognised, increased from £30.8 million in the prior period. If reserve releases from business that was originally ceded under quota share reinsurance contracts that have since been commuted are added to profit commission, the total for H1 2019 is £87.8 million compared to £66.0 million in H1 2018, an increase of 33%. This increase is due to positive development on prior underwriting years and a reduced loss on commutation.
Note 5 to the financial statements analyses profit commission income and reserve releases by underwriting year.