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In the world of insurance, it seems that Admiral has taken a leaf out of Horatio Nelson’s book. The British insurer has managed to avoid the huge losses suffered by its competitors by steering clear of underpriced risks. This was evident in their half-year results, which brought relief to shareholders as profits increased and underwriting losses decreased.
The motor insurance market has faced its fair share of challenges recently. The pandemic caused a decline in claims as cars remained stationary, leading to a drop in premiums. However, as lockdowns have eased and people have begun to drive more, both claims and prices for repairs have surged. Insurers were initially hesitant to raise premium prices due to the belief that inflation was temporary. Unfortunately, this resulted in the largest motor insurance loss in a decade in 2022.
Admiral shareholders have felt the impact of these losses. Prior to the publication of the results, the company’s share price had fallen by almost a third since the beginning of last year. However, the stock experienced a sharp rally following the results, rising by 7% on the day.
To evaluate the profitability of insurance companies, the combined ratio is often used. This ratio represents insurance losses and running expenses as a percentage of the premiums collected. Admiral’s group combined ratio for 2022 was 101.7%, indicating a challenging year. However, the first half of this year saw a significant improvement, with a ratio well below 100%, reflecting the better market conditions.
Premium prices have been swiftly increasing to compensate for the losses. According to the Association of British Insurers, the average UK motor premium in Q2 2023 reached a record high of £511. Admiral saw a 21% year-on-year increase in motor premiums during the first six months of 2023. This is in stark contrast to the meager 7% increase in the previous six months, which was significantly below the 10% rise in claims costs. Despite this, Admiral has traditionally been a leader in the motor insurance market when it comes to competitive pricing. However, this is reflected in the decrease in market share in the first half of the year, with a 7% drop in motor customers compared to last year.
Direct Line, a peer in the motor insurance sector, will be hoping for a similar turnaround. The company faced substantial losses due to incorrect pricing last year, leading to lower dividends and the resignation of its CEO. The balance of profits for motor insurers is being restored not only through premium increases but also through stabilizing claims costs. This is attributed to better access to parts and a slowdown in the increase of prices for second-hand cars.
Insurance companies are often favored by shareholders for their reliable dividend payments. Although Admiral’s dividends dipped slightly, the shares are still predicted to yield a 5% cash return this year. With the potential for further earnings upgrades, the dividend and yield could even turn out to be higher. Tom Bateman at Berenberg, an investment bank, anticipates this positive trend.
Investors will also be closely watching the results from Direct Line for signs of improvement. Some analysts have speculated that losses could necessitate a call for additional investment from shareholders. A strong performance in the motor division, which will be revealed in the upcoming results, will provide reassurance that even with thin regulatory capital, the company can remain viable.
The Chinese economy and financial sector are currently under pressure, which is affecting China’s shadow lenders, known as trust banks. These financial institutions operate outside the regulated banking sector and are struggling. As a result, larger state-controlled banks will be forced to bear more risk. The trust industry, which started booming 40 years ago, focused on property developers and high-risk companies. However, with the property market crisis, the largest trust, Zhongrong International Trust, has already missed multiple payments and faces significant maturity amounts. The impact of the crisis will spread as property developers lose access to non-bank financing.
The property slump has also contributed to rising youth unemployment in China, reaching record numbers in recent months. The suspension of youth jobless data by the country’s statistics bureau raises concerns about the state of the Chinese economy and financial sector, especially for the banks.
Despite the challenges, shares of the largest Chinese banks, such as Bank of China and Agricultural Bank of China, have experienced a 20% increase this year. The worst effects of Beijing’s sector-wide crackdown seem to have passed. However, these banks still trade at only about a third of their tangible book value, much lower than their regional peers. In contrast, Hang Seng Bank is rated at almost 1.2 times its book value.
Investors are worried that the largest local banks will need to provide additional credit lines, as they did in the past. The banks had to offer over $160 billion in fresh loans to support struggling property groups last year. This emergency credit may need to be expanded to other high-risk local companies. As economic data reveals weaknesses, the renminbi has reached five-year lows against the dollar, potentially requiring state banks to support the currency. With numerous challenges ahead, even the largest Chinese banks should be approached with caution by investors.
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