Analysis: Has Admiral lost its shine?

For investors, Admiral has long been a FTSE darling thanks to a rising share price and dividend on the back of  stellar customer growth. But this era is ending, analysts believe.

The share price is overvalued and Admiral is now part of the UK motor insurance furniture, rather than a rising star. Concerns grew after the company’s 2018 results. Profits increased 18% to £476.2m, but this was buoyed by up to £140m in Ogden reserve releases – meaning it missed analysts’ expectations – and the shares fell 4%.

“Admiral is now a mature incumbent rather than a fast-growing challenger,” said Shore Capital equity research analyst Paul De’Ath. “The growth in motor continues to slow and the home and travel businesses both delivered small losses during the year. The international and price comparison businesses are slightly better than expected, but the size of the UK motor book in relation to the whole group outweighs positives elsewhere.”

International growth disappoints

Admiral had hoped international business would balance out the inevitable slowdown in UK motor. In 2014, founder and former chief executive Henry Engelhardt told Insurance Times of his big ambitions for European expansion. 

He said: “The 23-year-olds in Rome, Austin, and Toulouse are using the internet for everything and they will use it to buy car insurance. They are all agent-delivered markets. We are sitting on what I believe to be an obvious distribution switch.”

But, five years later, Admiral’s foreign operations made a £1.1m loss in 2018. Engelhardt’s predictions have not happened, largely because Europeans still use brokers. In the UK, direct insurance makes up 60% of purchases. In Europe, it is a fraction of that. 

Berenberg analyst Iain Pearce said: “While the Italian market continues to display positive trends, Admiral is unlikely to be able to disrupt European markets in the same way it disrupted the UK market in the early 2000s.”

Meanwhile, US growth is not having a significant impact on bottom line. Admiral took an impairment valuation on Elephant, its US motor insurance business, and Compare.com, its US price comparison website, last year.

Back in the UK, Admiral has tried to diversify into travel, van and even loans. But home and travel made a loss in 2018, van is becoming increasingly competitive and loans have only just begun. Added to all this, Admiral could face diminishing reserve releases, putting added pressure on profits.

“Reserve releases will eventually begin to normalise as recent underwriting years are unlikely to be as profitable as in the 2010-2013 period,” says Pearce.

Strategy on course

However, Admiral chief financial officer Geraint Jones is confident the strategy is right. He stressed that Admiral now has around 15% of the UK motor book and argued that, while the rate of growth is naturally slowing, it is still strong.

“In 2018, we grew UK motor nearly 10% in customers. When you are that size, it’s not a bad rate of growth at all,” he said. 

Jones admitted European and US direct buying has not taken off like it did in the UK at the turn of the millennium, but said Admiral is investing in acquiring new US customers. He said the expense ratio will come down once typically loyal customers land on the books, resulting in increased margin and profitability. 

“We grew 10% in Spain, nearly 20% in Italy and more than one-third in France. The US was up over double digits. They are all growing quite nicely despite those challenging conditions,” he said.

But market watchers believe Admiral’s best bet of quickly impressing shareholders is through faster growth in UK home insurance. Home makes up around a quarter of rival Direct Line’s profits in an average weather year, compared to 1%-2% for Admiral. 

Jones said: “We have not really tried to cross-sell to our existing customers that hard until quite recently, with our multi-cover offering. Our hope is that we will be able to grow that business much faster than motor is likely to grow over the coming years.”

The final doubt is whether Admiral can sustain its level of reserve releases as the run-off enters a more choppy period of claims. Admiral is “very conservative” when it comes to reserving, said Jones.

The higher-claims induced profit warning in 2011 would have shaken out any complacency, boss Engelhardt said at the time. 

Jones said: “It’s probably fair to say our reserve releases won’t stay to the level where they’ve been in the last couple of years. Nonetheless, we would always take a cautious approach to reserves and so always expect reserves releases to be a meaningful, substantial part of our profitability.”