Solvency ratio concerns weigh on Admiral as its share price dives

Oliver Gill
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Wales v Ireland - RBS Six Nations
Admiral's strong association with Wales includes housing its headquarters in Cardiff and sponsoring the Welsh rugby team (Source: Getty)

Insurance giant Admiral led today's FTSE 100 laggards as it slid eight per cent after revealing a solvency ratio decline within its half-year results announcement that wasn't to everyone's tastes.

The figures

Group profits were up to £193m from £186m on turnover that jumped nearly 20 per cent from £1.06bn to £1.26bn.

UK operations profit before tax increased slightly from £219.2m to £222.8m

International business revenues increased by 44 per cent from £110m to £159m but the division remained loss-making. It generated £12.9m of losses before tax, up from £11.2m in the previous year.

Its post dividend solvency ratio – the proportion of capital it has set aside to underwriting, investment and operational risks – fell from 206 per cent to 180 per cent.

Total interim dividends climbed 23 per cent from 51.0p per share to 62.0p per share.

The half-year payout was made up of a normal dividend of 36.8p together with a special dividend of 14.2p – taking it to being on par with 2015. On top of this was a return of capital of 11.9p

Why it's interesting


The results were broadly in line with market expectations which makes the share price dip somewhat surprising.

"Admiral continues to deliver some of the best operating performances in the sector, with profits and turnover at another all-time high, and the group continuing to deliver some punchy underwriting performance," said Nicholas Hyett of Hargreaves Lansdown.

"However, that history of strong performance means that investor expectations are high, and with shares up 20 per cent in the last three months even today’s results have not been enough to keep them from falling back,"

But Shore Capital felt today's efforts were a small miss compared to market consensus and that this was a "rare occurrence for Admiral".

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Solvency ratio

Nevertheless, the main reason mooted by analysts for the share price drop was the decrease in the solvency ratio. This was also surprising given the decrease was partially instigated by management ramping up dividends – hardly new news.

"The group continues to manage its capital to ensure that all entities within the group are able to continue as going concerns and that regulated entities comfortably meet regulatory capital requirements. Surplus capital within subsidiaries is paid up to the group holding company in the form of dividends," Admiral said in its results statement.

Read more: Unintended consequences: Tinkering with Solvency II

Buried in company commentary was a reference to the Brexit vote and its impact on the ratio.

"Significant downwards movements in risk free interest rates during 2016 (especially post the EU referendum result in June) led to an increase in the regulatory valuation of the UK car insurance business claims liabilities and a consequent reduction in the value of the group's own funds.

"This amounted to a downwards movement of approximately 20 per cent in solvency ratio terms following the EU referendum result," the Cardiff-based company said.

In response, Hargreaves Lansdown's chief analyst, Laith Khalaf said:

Someone, somewhere has decided they don't like the change in the solvency number

Admiral said it has applied to the Prudential Regulatory Authority and its Gibraltar equivalent to change its method of calculating its solvency requirements to include a volatility adjustment. If passed, current ratios would stand at 196 per cent.

What Admiral said

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Chief executive David Stevens said:

What a great time to take on the stewardship of Admiral. The last six months have shown the enduring, and indeed increasing, strength of the UK business and has seen a step change upwards in growth from our developing international businesses.

In the core UK car insurance business, we've benefitted from an increasingly rational motor market with evidence of a move towards a less violent cycle. Prices have been rising, and we've used this opportunity to grow our motor book strongly. Meanwhile, the growth of our household book continued apace, demonstrating our ability to expand successfully beyond our car insurance core in the UK.

Overseas, Elephant launched into two new states and our longer-established European insurance operations, collectively, moved tantalisingly close to profitability, while also accelerating the rate of growth and investing more in promoting our brands. All our price comparison businesses, including Confused, grew rapidly.

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