The UK motor insurance market is one of the toughest markets to navigate in the world.
Indeed, UK motor insurance industry as a whole has been loss-making for 20 of the past 21 years. 2013 was the only year in recent history when the sector has reported an underwriting profit.
So,Admirals(LSE: ADM) growth and record of success since its founding in 1993 is extremely impressive.
And according to todays trading update from the company, Admiralis still racking up steady growth in a tough market.
Steady growth
Admirals first-half profit for 2015 increased by 0.6% from a year earlier to 186.1m. These results were boosted byhigher reserve releases. The group released 92.6mof reserves set aside for claims in previous years, compared with 73.1m pounds in the first half of 2014.
Earnings per share for the period increased by 4% to54.8p, beating City expectations. Analysts were expecting Admiral to report first-half earnings per share of 47.0p.
Net insurance premium revenue, which takes into account reinsurers premiums, slipped 1.2% to 228.9m in the half, down from 231.7m as reported a year earlier. Moreover, other revenue from insurance products sold alongside car insurancedeclined 3.2% to 165.0m. Still, while income contracted across many of Admirals divisions,a 19%fall in net insurance claims helpedboost profitability overall.
Whats more, during the first half of the year, Admirals combined ratio, a measure of profitability, declined to 82.7%, from 85.1% a year earlier. A combined ratio below 100% indicates that the company is making an underwritingprofit. Admirals combined ratio is actually on of the best in the UK motor insurance market. PeersesureandDirect Line Insurance(LSE: DLG) reported combined ratios of 95.8% and 89.4% respectively.
A better play?
Admiral has become one of the FTSE 100s most treasured income stocks over the past few decades. Indeed, the company has adopted a stance of returning the majority of its net income to investors via dividends.
Over the past five years,Admiral has returned a total of 1.1bn to investors via both regular and one-off dividend payouts. This cash return works out to be around 90% of Admirals net income generated over the period.
As Admiral has one of the lowest combined ratios in the insurance sector,investors should be set to receive lofty dividend payouts for years to come.
That being said, Direct Line is quickly catchingup toits larger peer. Over the past threeyears, Direct Lines combined ratio has fallen steadily, as the group has cut costs and diversified away from the UK motor insurance market. For example, Direct Lines combined ratio stood at 98.8% for full-year 2012. As noted above, the group reported a combined ratio of 89.4% for the first half of 2015.
A new dividend champion?
Direct Line has a cash-rich balance sheet, and could be gearing up to announce a hefty special dividend payout. The insurersrisk-based capital coverage ratio was155.9% at the end of June. Management is targeting a coverage ratio of 125% to 150%, anything above that level can be considered to be excess capital.
Management has stated that it will consider returning excess capital to shareholders when it reports full-year results for 2015. Direct Line has already issued one special payout this year.
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Rupert Hargreaves 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.