15th Aug 2022 15:45
(Alliance News) - Admiral Group PLC's shares have struggled in 2022, but its first half performance, according to Berenberg, has shown the insurer is firmly on the right tracks and expects the shares to turn around.
Shares in the FTSE 100-listed insurer - whose offering includes, home, car, pet and travel insurance - were 1.6% higher in London on Monday afternoon at 2,293.00 pence each. Over the past five days, since its first half results, Admiral is up 15%.
Despite the recent impressive performance, shares are down 25% in 2022 and have lost a steep 37% over the past 12 months.
Berenberg said the share price performance has "greatly under-appreciated the strength of the group". It holds a 'buy' recommendation with a target price of 2,903p.
Last Wednesday, Admiral reported a first-half profit fall, hurt by accelerating claims inflation in its motor insurance arm.
Berenberg said, despite the profit drop, the insurer showed signs of strength.
"Admiral has materially de-rated during 2022 as the market has become concerned about the UK motor insurance market - these concerns were elevated following profit warnings at Admiral's two closest peers, Direct Line Insurance Group PLC and Sabre Insurance Group PLC," the German investment bank said.
Its first half results, however, showed the de-rating was "unwarranted," Berenberg said.
"Admiral delivers whatever the weather and in our view this should be rewarded with a premium valuation," it added.
Group pretax profit fell 48% year-on-year to GBP251.3 million from GBP482.2 million. Compared to pre-Covid times, however, pretax profit was up 19%. Pretax profit was in line with consensus, broker Peel Hunt noted.
Berenberg continued: "In our view, Admiral's strong half-year results went a long way to proving to investors why the company warrants its premium valuation multiple. As motor insurance pricing rises in the UK throughout the remainder of 2022, we expect Admiral's premium valuation to return. We also think there is scope for EPS upgrades in 2023E and 2024E, where we are approximately 5% and 14% above consensus estimates."
Revenue in the six months to June 30 rose 5.7% year-on-year to GBP1.85 billion from GBP1.75 billion. Total UK premiums written, which comprises its motor, home and travel insurance units, was 2.8% higher year-on-year at GBP1.27 billion from GBP1.23 billion.
The firm reported a first half combined ratio of 96.7%, worsening from 75.2% a year earlier. The higher figure shows Admiral is making less profit from its underwriting operations.
Berenberg added: "Pricing in UK motor insurance has reached a turning point in our view and we would expect material price increases throughout the second half of 2022 and into 2023.
"Admiral raised new business prices by 16% between March and July, ahead of the market. Admiral also benefited from a rise in retention rates during the first half of 2022, in part driven by new regulation which prevents dual pricing. We believe Admiral’s generous marketing strategy during Covid-19 may also be helping to raise retention levels."
Elevated claims inflation was an "important issue" during the half.
"The main drivers of claims inflation are higher used car prices, higher repair costs, longer repair timescales and higher expected levels of wage inflation impacting the projected costs of bodily injury claims," Admiral said.
Admiral declared a 60.0p per share ordinary interim dividend, down 48% from 115.0p a year prior. Including special dividends, stemming from the sale of its Penguin Portals comparison site, the total interim dividend was down 35% at 105.0p. The special dividend linked with the disposal amounted to 45p in the first half of 2022, down a touch from 46p a year earlier.
Admiral in December 2020 came to an agreement to offload its Penguin Portals and Preminen price comparison sites for a total value of GBP508 million to the owner of Zoopla.
Despite the overall pleasing performance, Berenberg did note its international business remains a "key disappointment". The German bank would prefer if it sold its US business.
"In contrast, the home insurance division is improving nicely, and the underlying loss ratio continues to fall; in part driven by strong new business price increases associated with the new pricing regulation," it added.
By Paul McGowan; [email protected]
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