Seeing Big Yields from Insurance

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We have had results recently from some insurance companies which offer good yields.

Earlier in the week we had Amlin (AML) which is a Lloyds of London Corporate capital business engaged in non-life insurance and reinsurance underwriting in the Lloyd’s market, Bermuda and Continental Europe. Its operating segments consists of Amlin London, consisting of the Reinsurance, Property & Casualty, Marine and Aviation business units. Amlin UK, underwriting commercial insurance in the United Kingdom domestic market, Amlin Bermuda, which writes property reinsurance business, via Amlin AG, Amlin Re Europe, which writes continental European non-life reinsurance business, via Amlin AG; Amlin Corporate Insurance, which provides marine, corporate property and casualty insurance in the Netherlands and Belgium.

They reported excellent results with Pre Tax Profits up 23.3% and a ROE of 19.8% and a combined ratio of 86% (basically claims plus expenses to premiums received) less than 100% is good and the lower the better. The dividend was also up a slightly better than expected 8.3% at 26 pence v 25.2 pence forecast for a yield of 5.65% at 460 pence. Enough said as it is rather dull and is probably close to fair value which I would base off of price to book as follows. 

They target 15% ROE over the cycle, so it is currently at the high end, although they have averaged 18% in the last ten years. It has Net Tangible Assets of 288.7 pence so I would value it on a price to book of 1.5 to 2 times giving a range of 433 pence to 577 pence with a mid point of 505 pence. So trading at 460 pence it seems OK with a nice yield. However, note they talk of some softening of rates so analysts are expecting a drop in earnings for this year. That's just the nature of this one, but they are still expected to post a small increase in the dividend given their progressive policy, although not at the same rate of increase as this year. So not that exciting but OK as part of a diversified income portfolio.  Meanwhile...

...today we have had results from Admiral Group (ADM) the car and more recently household insurer which also has a price comparison business Confused.com. 

Admiral Group announces profit before tax of £370 million for the year to December 2013, an increase of 7% over the previous year. The Board is proposing a final dividend for 2013 of 50.6 pence per share which together with the interim of 48.9 pence makes 99.5 pence 10% up on last years total for the year and was better than analysts had forecast for next year! At a share price of 1485 pence this gives a yield of 6.7%. 

The slight complication with the dividend on this one is the fact that they do split it between an ordinary dividend and then add specials from ancillary income. They explain this as follows: 

"So it was in 2013, with group pre-tax profits up 7% at £370 million. Taken together with our capital efficient model this made possible full year dividends of 99.5 pence per share, 10% higher than last year. Whilst the level of dividend is something we reassess regularly, we continue to believe it is right for Admiral to retain the flexibility derived from the distinction between a normal dividend based on a 45% pay-out ratio, this year amounting to 46.9 pence per share, and the special dividend we are able to afford because of our low capital model. In 2013 this special dividend again exceeded the normal dividend at 52.6 pence per share, representing our available surplus, after taking into account our required solvency, and a margin for contingencies."

Overall a fairly simple business which is run efficiently by a long standing management team and a Chief Executive who owns 13.4% which is expanding in a similar fashion into household insurance and overseas territories to keep the growth going. So I'll leave the Chairman to explain what he thinks make their business different with this extract from the statement:

Our Business 
"I am frequently asked what it is that makes Admiral different. What is it that has made it possible for this business to grow in 10 years from a private company with a 3% share of the UK private car insurance market and making pre-tax profits of £57 million in 2003 to a member of the FTSE-100, one of the largest in the UK private car market, and with profits of £370 million today?

My answer is that there is no one thing that if you lifted it out of Admiral and put it into a competitor would immediately transform that company's fortunes. Rather, there are a set of attributes that together make Admiral what it is, a combination that would be very hard to replicate as you would need each and every element to come together to the right degree and in the right way. To pick out the top 10: 
(see next column)

• Management: the combination of the enormous experience and proven track record in this sector of our founding executives with the capability of those of our senior managers who have successfully developed their careers inside the business
• Our culture: many companies document their culture at length - the best way to understand Admiral's culture is to spend a day in one of our offices to appreciate the depth of staff engagement with a business of which they all own a part; the vibrancy of the working environment; the commitment to the customer; and the engrained desire to deliver a quality output and continuously improve that quality
• Our employees: we believe that if people enjoy what they do, they do a better job - in 2013 Admiral was voted the 2nd Best Large Workplace in the UK and the 2nd Best Multinational Workplace in the Great Place to Work Institute awards; Admiral has been in the Sunday Times 100 Best Companies to Work For in the UK every year the list has been compiled.
• Focus: Admiral has spent 20 years refining how best to provide the service people look for from their car insurer, and the last 13 years developing Price Comparison, in particular for car insurance. It is only with the advent of Admiral Household Insurance in the last year that we have dedicated any material effort outside private motor insurance and price comparison
• Pricing: data analysis lies at the heart of our pricing algorithms. With three million customers and substantial amounts of data, our experienced pricing team is excellently placed to derive competitive advantage in the UK, and to inject that experience into our new businesses overseas as they build the scale from which one can derive meaningful analysis
• Claims management: our experience, culture and focus all combine to deliver a claims result that speaks for itself with market-leading loss ratios, sustained reserve releases and high levels of profit commission earned under our reinsurance arrangements, as well as consistent positive feedback from customers on the claims service they receive
• Controlled test and learn: everything that Admiral is now has been built from the ground up, taking measured steps to test how well we understand the challenge ahead and the effectiveness of our solutions, and then to learn from that experience and from the experience of those who have tried other strategies. That is how the Admiral team has set about building private motor businesses in five countries, Price Comparison businesses in four, and now a Household Insurance business in the UK. While slower than growth by acquisition, it is much lower risk and enables one to construct, in all respects, the platform one wants for the future
• Low cost: the results speak for themselves - an expense ratio in our established UK business of 15%, almost half the market average. Cost consciousness has to be engrained to be effective, a core part of the way in which we do things. It is everyone's responsibility, not just that of the Finance team
• Low capital employed: probably because everyone at Admiral is, or becomes, a shareholder, we regard our shareholders' money as our own, seeking to use it as efficiently as we can. Hence our model based on reinsurance relationships underpinned by strong underwriting results, with Admiral itself only providing the capital backing for a minority of its business. Hence our commitment to give back to shareholders whatever surplus we do not need to support our current business. The result  in 2013 - a 58% return on equity and a 95% pay-out ratio giving rise to a 8% dividend yield
• Low risk: Admiral has always sought to protect its downside characterised by our reinsurance model; an approach to claims reserving that is prudent in the early stages and releases only when justified by experience; an organic growth strategy; a test and learn approach of taking measured steps before investing further; sticking to what we understand well; and a conservative approach to investment management

It is the sum of these elements that gives me confidence in Admiral's sustained competitive success across the insurance cycle. In 2013, as in 2012, the cycle was not at the right point to justify growth. Market rates fell again last year, probably by around 13%. It made no sense to chase the market down, particularly for a player such as Admiral that has a significant combined ratio advantage over the market as a whole and can, therefore, afford to raise rates less quickly than the market when the cycle turns up. Our strategy in the UK was to hold our book at its existing level, recognising that this would result in a fall in UK Car Insurance turnover. At the same time, our claims results were excellent, supporting significant reserve releases from prior years.

We continued to apply our test and learn approach to our young businesses, particularly those overseas. For example, in Europe, Admiral Seguros in Spain launched its second brand, Qualitas Auto, to broaden its market appeal. In the USA, our auto insurer, Elephant Auto, grew its vehicle base by 34%, and we started test-marketing comparenow.com, bringing the successful European model of insurance price comparison to the USA. We will progressively increase our investment in this business as justified by the performance of its marketing. Price comparison businesses typically turn profitable much earlier than insurance businesses as they have lower fixed overheads. LeLynx, our French Price Comparison business, returned a profit in 2013, its third full year of operation, and Rastreator has been profitable since 2011, its second full year.  

We have also been encouraged by our launch of Household Insurance in the UK and the potential this demonstrates. Admiral's overall result is, and will for some time remain, inevitably dominated by our UK Car Insurance business and, therefore, by the UK private motor insurance cycle. And it is equally inevitable in a cyclical industry that there will be periods when profit growth is more muted, derived from a balance between lower prices and consequently lower volume growth and the positive development of prior years' claims."