Growth Continues to Slow for Admiral

LONDON -- Admiral Group (ISE: ADM.L) is feeling the pressure from competition, as turnover grew 6% despite an 11% increase in vehicles insured. More importantly, a higher rate of accident claims continues to weigh on profitability as the group's combined ratio (the percentage of revenue that goes toward paying claims and administering policies -- an industry metric for measuring profitability) climbed to 95.2% from 94.2% a year ago, though it was down from 95.7% for all of 2011.

The good news for income investors, however, was the 15% increase in the interim dividend to 45.1 pence, providing a trailing yield of 6.9% while the City's estimated forward yield is 7.2%.

The good times are gone
The combination of increasing regulatory review, political pressures, and newly invigorated competition are taking their toll on Admiral and its once-astounding growth. Management as much as admitted the going would be tougher from now on in its commentary.

After favourable conditions during 2010 and the first half of 2011 in the Group's core UK Car Insurance market, there has been a marked change in 2012, with premium rates falling and competitors seeking to add market share. In this environment it was appropriate to moderate the rate of growth in the UK, leading to a year-on-year increase in vehicles of 7% to just over three million.

The competitive marketplace forced competitor RSA Insurance (ISE: RSA.L) to dramatically scale back its motor insurance operations, and the company recently reported a 19% drop in its UK Motor premiums as it trimmed unwanted policies. The focus on business that actually brings a profit helped the group record its first underwriting profit in four years, but helps illustrate the state of the auto insurance market here in the U.K.

Despite the challenging environment, Admiral's shares have recovered from the massive sell-off seen last November. There were fears that the company's rapid growth from 2009 to 2011 had been achieved at the cost of responsible underwriting, and future profitability sent the shares down 26% in one day.

However, it appears the growth that once enticed investors to bid Admiral shares up to a price-to-earnings ratio over 20 is likely over. Growth will likely be driven by the company's currently unprofitable international operations as I expect gaining market share in the U.K. will be tougher going forward and the balance between growth and profitability will be management's challenge in years to come.

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