Stockbroking firm Jefferies says it has resisted temptation to upgrade Admiral’s stock to ‘buy’ from ‘hold’ on concerns about the profitability of its new business.
Admiral’s stock price has dropped 17% over the past two days following the release of its first-half results, which would normally represent a buying opportunity.
However, the sharp drop in Admiral’s reserve releases to £4m in the first half from £17.3m in the same period last year has prompted Jefferies to question the profitability of business that Admiral has recently put on its books.
“Admiral has grown its UK private motor book by nearly 80% 2008-H1 2011, reaching around an 11% market share. Ostensibly, this was with no sign of margin pressure,” wrote Jefferies analyst James Shuck in a research note. “Both accident year loss ratios and the actuarial view of ultimate years have actually improved. With the H1 results, Admiral posted far fewer reserve releases with adverse development booked on 2008/9 underwriting years. This is a major change to historical trends. Just what has Admiral swallowed?”
Shuck said Jefferies’ existing cautious stance on Admiral was driven by concerns that the market was being too optimistic about the profitability of Admiral’s new business. “It is now clear that there is much less conservatism in the actuarial view of ultimate loss ratios,” Shuck wrote. “In fact, 2009 and 2010 saw negative development. Admiral now suggests that there is an equal chance of positive and negative changes to ultimate loss ratios.”
Jefferies has also lowered Admiral’s earnings per share target by between 3% and 4% because it is removing referral fees from its forecasts “as we expect these to be banned”.
What's next for Admiral? Read our analysis: Investors stall as Admiral hits a dead-end.
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