This company’s steady transformation and robust finances have set it on course for growth

A share price chart that goes from the top left-hand corner to the bottom right over the past two years, strong brands, an improving trading environment and a tempting valuation, especially on the basis of dividend yield, are all attributes for which this column searches when it assesses a stock.

FTSE 100 member Admiral fits the bill each time and is therefore worthy of consideration for portfolio inclusion. 

Best known for its Admiral, Elephant and Diamond brands, Admiral is based in Wales, with operations in Spain, Italy, France, the USA and India, and it provides car and travel insurance, as well as financial and legal services.

The shares peaked at around £34 in September 2021 and it has been pretty much downhill all the way since then, although the share price has shown a little more spark of late.

That share price weakness reflected profit warnings from sector rivals Sabre (SBRE) and Direct Line as much as anything else, although Admiral’s own results for 2022 were no thing of beauty either.

Pre-tax profits for the year fell by 39pc year on year (and even undershot the pre-Covid year of 2019 by 7pc), thanks to increased claims and how inflation jacked up the cost of car repairs. 

Direct Line’s dividend cut, and then the abrupt departure of its chief executive, back in January may not have helped sentiment either. But one statistic that does jump out is how Admiral now has 33pc more customers than it did in 2019. The Cardiff-based concern even added just under 1m customers in 2022 to grow the total by 11pc to 9.3m. 

That seems like a good base for any potential profit recovery, especially as prices are firming in the UK household and motor markets.

Even after a tough year of more traffic accidents, rotten UK weather and inflation, the UK operation maintained a combined ratio of 91.2pc and that was its worst result in a decade. (Any figure below 100pc shows an insurer is profitable.)

Admiral is already making more money from the UK motor operation than it did before the pandemic, while losses in the US are coming down, thanks to rate increases (again), reduced expenses and a more select approach to customer acquisition. 

The combined ratio for the international operations was 125pc for a loss of £54m.

Improvement here would help overall group earnings. Growth in the European target markets and the launch of new products and services, could give profits further momentum over time. 

Admiral’s entire customer base came from motor insurance just 10 years ago. A third now turn to the company for home, travel and pet insurance, or personal loans and car finance. Admiral Money turned its first profit in 2022.

Meanwhile, Admiral is robustly financed, using the solvency ratio as a reliable yardstick. This measures how much capital an insurer has relative to the risk it has taken. 

A ratio of 100pc, under Solvency II regulations, means that an insurer should be able to meet all of its obligations even in the event of an extreme shock. Admiral’s solvency ratio did dip in 2022 but only to 180pc from 195pc. 

It was a dip down to 147pc from 160pc, after poor underwriting results and a generous share buyback programme drained the capital base, which flushed out the profit warning and dividend cut from Direct Line.

Admiral did reduce its own dividend to 157p a share in 2022 from 279p in 2021, including special dividends funded by the sale of the Penguin Portals comparison business. Analysts have also pencilled in a further reduction for 2023 to 122p a share. 

Even that is enough for a juicy 5.4pc dividend yield from shares in a company whose policy is to pay out 65pc of post-tax profits as a normal dividend and then offer special dividends, once solvency capital requirements are met, with plenty of headroom on top.

This formula, backed by, conservative investment of cash, additional capital protection through the use of reinsurance and careful underwriting has enabled Admiral to pay out aggregate ordinary and special dividends worth £14.09 a share over the past decade. 

That is an eye-catching figure when the current share price is £22.59 and one that will appeal to income seekers, even if we must accept that the past is no guarantee of the future. A wider upturn in trading may offer scope for capital appreciation too.

The company hosts its annual meeting tomorrow and Questor believes Admiral could be ready to sail higher.

Questor says: buy

Ticker: ADM

Share price at close: £22.59

Russ Mould is investment director at AJ Bell, the stockbroker

Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 6am.

Read Questor’s rules of investment before you follow our tips