Questor share tip: Avoid Admiral until its growth path is clearer

Ahead of the insurance sector’s interim results next month, Questor takes a look at Admiral, one of the more colourful firms in the car insurance market.

Premium leadership

When Admiral sets out its half-year earnings on August 19, it could be the last time that Henry Engelhardt presents the figures. The American who helped to found the firm is due to leave before next May, ending 25 years in charge.

It is unclear whether David Stevens, the co-founder and new chief, will continue his predecessor’s tradition of framing the results with curveball metaphors – last year was likened to a Baked Alaska, both hot and cold – and whether he will devote as much time to building the two-year-old US unit.

Mr Engelhardt will remain at Admiral in more than spirit: he owns 11.7pc of its shares. Any sales to fund his retirement could be met with alarm unless growth is secure.

Price crash

Admiral was among the first car insurers to raise prices in late 2014. Several years of fierce price cuts since a Government clampdown on dubious claims are now giving way to new forms of claims inflation.

The AA has said premiums will really start to rise this year, accelerated by the Summer Budget, which cut corporation tax but raised the tax on premiums from 6pc to 9.5pc.

With some insurers already near break-even after costs, there is pressure to raise premiums further. Barclays expects Admiral’s combined ratio to rise from 76.8pc to 86.4pc, meaning it has more headroom than most to resist another price hike.

Silicon roundabouts

The car hire firm Uber recently chose to underwrite its own drivers, according to UBS analysts who said this was the sort of nasty shock facing insurers that do not adapt to new technology. Meanwhile, up to half of all cars will be autonomous in some way by 2025, Deloitte has predicted, making them safer but shifting the risk from motorists to manufacturers. Admiral set up Confused.com in 2002, and while the site’s revenues of £81m and profits of £16m last year are a drop in ocean, the firm has made its mark online. The trick now is to keep up.

Dividend outlook

Admiral is one of the most generous dividend payers in the FTSE 100, handing over 95pc of its earnings per share last year. This payout is uncertain, with an expected profit dip, an unsustainable release of reserves in recent results and a surprise £200m bond issue last year.

The shares trade at 15.5 times this year’s earnings, which appears quite rich for the sector given the forecast of little or no earnings growth in the next few years. Questor would sit on the sidelines until the firm’s trajectory is clearer.