The UK car insurance giant delivers a record 75.6p dividend for 2011.
Car insurance group Admiral Group (LSE: ADM) unveiled a 13% rise in full-year pre-tax profits and an 11% dividend increase this morning -- taking its total dividend for 2011 to 75.6p.
Admiral insures one in 10 cars in the UK and it has delivered rising turnover, profits and dividends every year since its 2004 flotation. In 2011, its turnover rose by 38% to £2.19bn, producing pre-tax profits of £299m.
Pass the risk
Admiral's business model is to pass the majority of its insurance risk to third-party wholesale insurers, through reinsurance deals.
Its profits are derived from a share of the eventual profitability of each policy -- so when claim costs are higher than expected, Admiral's profits can drop substantially. This is what happened last year.
Claim costs up
Back in November, Admiral announced that that an unexpected increase in claim costs was going to result in a fall in underwriting profit for 2011.
Its UK car insurance business delivered a combined ratio of 84% in 2010, meaning it only had to pay out 84% of the income it received in premiums. In 2011, its combined ratio increased to 91%; still good, but worse than expected.
Admiral blames this increase on higher bodily injury claim costs; a subject that has hit the headlines in recent months and become part of an OFT investigation into car insurance costs.
Price comparison
Admiral's Confused.com price-comparison website generated revenues of £72.2m in 2011, up from £59.6m in 2010. Profits remained broadly unchanged from 2010, at £16.1m, thanks to an increase in advertising spend:
"... the competitive market required greater media investment and resulted in a fall in operating margin to 21% (24% in 2010)."
This operating margin compares quite favourably to that of price-comparison giant Moneysupermarket.com Group (LSE: MONY), which recently reported an operating margin of just 13.3% on its £181.2m 2011 turnover.
Going international
Admiral is trying to expand its car insurance and price-comparison businesses into four overseas markets: France, Spain, Italy and the US.
So far, all of these activities are losing money, but growth is impressive and losses are falling. Admiral's international car insurance business grew by around 60% last year, while price-comparison revenues tripled.
Income share
Admiral's core business is still UK car insurance, which accounts for 90% of its turnover. It has 11% UK market share and a powerful brand.
A whopping 92% of Admiral's 2011 earnings will be paid as dividends, and the company has increased its dividend every year since it floated in 2004.
Despite the recent increases in its share price, Admiral still yields an inflation-beating 6.6% and would make a worthwhile addition to any income-focused portfolio.
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> The Motley Fool owns shares in Admiral.
