Why Admiral Group plc Is Following Esure Group PLC And RSA Insurance Group plc Lower

Admiral Group (LSE: ADM) edged lower after publishing its third quarter update this morning, reporting a 5% fall in UK car insurance turnover, despite a 5% increase in the number of customers!

However, the damage had already been done to Admiral’s share price earlier this week, when peer Esure Group (LSE: ESUR) reported an 8.8% fall in UK motor premiums, despite customer numbers remaining unchanged.

RSA Insurance Group (LSE: RSA) (NASDAQOTH: RSANY.US) has also fallen 7% this week, partially because of dismal UK motor numbers, but unlike its two peers, it isn’t dependent on this market, and is showing signs of recovery elsewhere.

Turning point?

However, the best time to buy is often at the point of maximum bad news, and there are some signs we may be reaching this point.

Admiral’s colourful CEO, Henry Engelhardt, said this morning that “Prices in the competitive UK car insurance market appear to be stabilising after a period of rapid deflation.”

Mr Engelhardt’s comments are backed up by the latest figures from the AA’s British Insurance Premium Index, which reported a £6 — or 1.2% — increase in the average premium during the third quarter.

However, the AA’s latest report also noted that the average car insurance premium is still 14.4% lower than at the same time last year — good news for drivers, but bad news for investors in Admiral and Esure, as continued price pressure could threaten the special dividends shareholders have become used to receiving.

Today’s best buy?

Admiral and Esure are dependent on the UK car insurance market, which is likely to make them more volatile, over the medium term, than an international general insurer such as RSA.

However, consensus forecasts for Admiral and Esure are still pricing in special dividends for 2014 and 2015, giving prospective yields of around 8% for both companies. These make RSA’s 2015 prospective yield of 3.7% seems puny, but it’s worth remembering that without special dividends, Admiral and Esure would offer similar yields.

 I believe RSA is a better long-term buy than the two car insurers, thanks to its size and diversity.

However, shares in both Admiral and Esure have fallen by 20% since July, and Admiral, in particular, appears to be well positioned to benefit from any upturn in motor premiums, and would be my pick for a medium-term trade.

Admiral and Esure's regular use of special dividends is a dilemma for investors: how reliable are these discretionary payments, which significantly increase both firms' yields?

Identifying reliable dividend stocks is a key element of the simple 7-step strategy described in "7 Simple Steps For Seeking Serious Wealth".

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Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.