Motor insurer Admiral Group PLC (LON:ADM) confirmed a big drop in 2016 profits as a result of the recently announced change to rate used for personal injury claims, but its underlying profits rose and it held its dividend steady helping its shares rally.
Like its industry peers, Admiral issued a warning last week following the decision by the Lord Chancellor Elizabeth Truss to slash the Ogden discount rate used for personal injury damages to minus 0.75% from positive 2.5%, pushing up the amount insurers will pay out in lump sum settlements for such awards.
The FTSE 100-listed firm said, taking the discount rate change into account, its pre-tax profits dropped by 25% to £284.3mln for the full-year to December 31 2016, down from £376.8mln in 2015.
On an underlying basis, excluding the effect of the rate change, Admiral’s 2016 pre-tax profits rose by 3.0% to £389.7mln as its net revenues increased by 13% to £1.02bn.
The group saw its overall customer numbers increase by 16% to 5.2 mln, with UK insurance customers up 14% to 4.1 mln, and International car insurance customers jumping 28% to 864,200.
As expected, Admiral maintained its full-year dividend at 114.4p, with a final payout of 51.5p, representing a normal dividend of 15p and a special one of 36.5p.
No flying start ...
David Stevens, Admiral’s group chief executive officer said: "My first full year as CEO, and after 25 years of almost uninterrupted profit growth under my predecessor, profits are down a quarter! Not exactly a flying start!”
But, he added: “On the other hand our ability to grow our businesses rapidly, both in the UK and overseas, and to absorb the shock of an eccentric government decision on discount rates while delivering a 37% return on equity and again paying a substantial dividend is a tribute to the health of the business and resilience of our model.”
Stevens succeeded Admiral founder Henry Engelhardt when he stood down as chief executive last year.
Analysts at Bernstein research said the underlying results were slightly ahead of their forecasts, including in the firm's UK car insurance market, which despite the firm diversifying into other countries and products, remains Admiral's main source of revenue.
They reiterated a ‘market perform’ rating on Admiral shares with a target price of 1,915p.
By mid afternoon trading, Admiral's shares had rallied from earlier falls, gaining 2.2%, or 40p lower at 1,839p..
Shore Capital analyst Eamonn Flanagan pointed out: “At an underlying level, the 2016 results were ahead of both consensus and our forecasts … with the final dividend of 51.5p as the company had indicated, resulting in a total for the year of 114.4p”.
He noted: “The ‘beat’ against our expectation was a better than we had expected result from the price comparison units.”
But the analyst repeated a ‘sell’ rating on the stock saying: “The PER is simply too rich given the Ogden noise, the potential Solvency II internal model issues and the continuing regulatory oversight of the ancillary/instalment income lines.”
-- Adds further broker comment, updates share price --