Plotting the Path to Increased Profitability: Admiral/Motor Insurance’s Rising Premiums

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The great naval tactician Horatio Nelson made it a rule never to interrupt the enemy when he was making a mistake. british insurer Admiral It has followed a similar strategy, staying out of big losses that rivals have blamed on undervalued risks.

semi-annual results this week were a relief for shareholders. Profits increased and technical losses fell.

The auto insurance market has had a rough ride of late. The pandemic brought things crashing down as cars remained stuck in driveways. With fewer drivers on the road, claims fell and so did premiums.

The pattern was abruptly reversed when the lockdowns were lifted and driving resumed. Then prices for parts, labor, and repairs skyrocketed. Talk of inflation being transitory was one reason insurers were reluctant to raise premium prices. The result was the biggest auto insurance loss in a decade in 2022.

Admiral shareholders paid the price. Before the results published on Wednesday, Admiral’s share price had lost almost a third of its value since the beginning of last year. The stock rallied sharply on the results, rising 7 percent on the day.

A common measure of earnings at insurance companies is the combined ratio. This is essentially a measure of insurance losses and ongoing expenses combined as a percentage of the money generated through premiums. At Admiral it was 101.7 percent for the group in 2022, reflecting the bad year. A number well below 100 in the first half of this year reflects the improving environment.

Premium prices are now catching up quickly to compensate. The UK average car premium of £511 in the second quarter was the highest on record, according to the Association of British Insurers.

In Admiral, Auto premiums increased 21% year-over-year in the first six months of 2023. Compare this to the paltry 7% increase in the prior six months, well below the 10% rate at which auto premiums increased. claims costs.

Admiral has traditionally led the broader auto insurance market in price. That is reflected in the market share it lost in the first half. The number of car customers was 7 percent lower than last year. Clearly better deals for drivers could be found elsewhere.

Shareholders of the Direct Line auto insurer expect a similar outcome. The company got its prices drastically wrong and incurred heavy insurance losses last year. That triggered lower dividends and the resignation from the company’s chief executive in January.

But premium increases aren’t the only thing helping to restore the profit balance for auto insurers. Claims costs are also leveling off, as a result of better parts supply and a slowdown in the rise in used car prices.

Shareholders tend to like insurance companies for the consistent and reliable returns they offer through dividend payments. These were down slightly at Admiral, but the shares should still deliver a 5 percent cash return this year. With the prospect of further earnings improvements, the dividend and yield could be even higher, predicts Tom Bateman of Berenberg, an investment bank.

Investors will also be closely watching DirectLine’s results for signs of improvement. Some analysts have speculated that the losses would prompt a call for shareholders to invest more money in the company. A decent performance in its engine division in results released next month will be reason to think that even thin regulatory capital is enough to keep it on track.

Banks of China: demolition risk

Seen but not heard is an old-fashioned guide to the best behavior of children. The bureaucrats in Beijing don’t want China’s youth to be seen either. The country’s statistics office announced it. would fail youth unemployment data this week.

This indicates the dire state of the Chinese economy and financial sector. China’s shadow lenders, the trust banks, are feeling that pressure. These financial institutions operate outside of the more heavily regulated traditional banking sector. As they falter, the larger state-controlled banks will have to bear more of the risk.

China’s $2.9 trillion trust industry began 40 years ago amid a booming economy. When the largest local banks couldn’t keep up with the demand for loans from fast-growing businesses, trusts stepped in to help. Given generous licenses to invest in many types of assets, they focused on real estate developers and high-risk companies.

The housing crisis has taken its toll ever since. The greatest trust, Zhongrong International Trust, you have missed at least two payments. It has investment products worth Rmb39.5bn due this year. As developers lose access to non-bank financing, the fallout among them will spread.

Rising youth unemployment is one result of the property slump: the numbers have set new records in recent months. Officials mentioned the need to improve the measurement methodology. But the move comes on the heels of missing-expectation retail and factory sales data. Taken together, this poses a serious challenge for Chinese lenders.

Shares of the biggest banks, including the Bank of China and the Agricultural Bank of China, are still up a fifth this year. The worst of Beijing’s sectoral crackdown appears to be over. However, they are still trading at around a third of tangible book value, well below their regional peers. Hang Seng Bank, by contrast, is rated almost 1.2 times.

Investors worry that the largest local banks will have to replace credit lines, as they have done in the past. Lenders had to bail out housing groups that were floundering last year by offering more than $160 billion in new loans. That emergency credit is likely to be expanded to other high-risk local businesses.

As economic data reveals weakness, the renminbi has fallen to five-year lows against the dollar. Therefore, state banks may also have to support the currency. With so many cleanup jobs ahead, investors should be wary of even the biggest Chinese banks.