Where does Admiral go from here?

This time last year, Admiral shocked the market with a profit warning. The once indestructible beast was showing mortal wounds and a blaze of negative publicity and slew of analyst downgrades quickly followed. The market expected two or three profit warnings.

But a year later, that hasn’t happened. What has happened, as revealed by today’s results, is that turnover is stalling as prices soften. The £1.5bn turnover for the nine-months is unchanged from last year.

One analyst, Kevin Ryan from Investec, is targeting a brutal halving in stock price to 500p from its current high of 1100p.

Exceptional performance

What do we make of all of this? Firstly, let’s not forget that Admiral’s performance is recent years has been remarkably good compared to its peers.

It has largely avoided the losses from credit hire and bodily injury that have caused such problems to rivals like Direct Line and Equity Red Star.

Chief executive Henry Engelhardt has achieved this by leading a business with excellent risk selection, clever pricing and arguably a superior business model in incentivising better performance from staff.

Part of the retained earnings are distributed to staff as an award for their performance. Underpinning all of this is a low-cost business operating from Cardiff.

It’s expense base is superior to competitors, historically, at anywhere between 10 and 15 points. Finally, the Admiral management shrewdly kept to motor and didn’t branch out, meaning they remained very focused.

All these qualities made Admiral a trailblazer in recent years: a darling of the stockmarket and wondrous shining beacon of performance that had competitors squinting in pain.

Competitors catching up

What’s happened now, however, is that other business have cottoned onto the Admiral business model and either copying it or improving on it. Imitation is the sincerest form of flattery. Competitors are creating low-cost aggregator purposed models to compete with the likes of Admiral.

Cheap outsourced call-centre staff are the gameplan for many motor insurers, but the holy grail is shovelling customer queries onto automated digital responses, while mantaining some level of decent service.

Aviva’s quotemehappy, for example, was specifically set up as an aggregator vehicle. Then you have companies like Hastings, which is copying Admiral’s reinsurance model. Around 50% of Admiral’s income comes from selling ancillaries and add-ons. It’s a cute idea. But now many insurers, and brokers such as Swinton, who have been aggressive in selling these products, are doing it.

The bottom line is that if Admiral continues down its current path, it’s shareholders will lose value as the share price dwindles and eventually stabilises as it becomes a run-of-the-mill large motor insurer, rather than the exceptional business it once was. A sort of Direct Line lite. So how does Admiral maintain its exceptional performance?

Where next for Admiral?

In the last twenty years Admiral latched onto the technological game changer of the internet much quicker than its rivals.

But there is no such technological game-changer out there. Instead, perhaps, there are many small opportunities for improvement.

Here are a few: telematics and potential affinity deals with car-markets who have the technology in-built from production; breaking into the home insurance market while there is still space; investment in technology for customer profiling, especially once the DVLA database is hooked up to insurer systems from 2014 onwards; ensuring Admiral policies and claims can be transacted in an easy-to-use manner on all mobile platforms. Then there is still the great unknown, but potential gold rush, of transacting SME online.

Certainly, expansion in commercial vehicle, such as taking on fleets, is probably within Admiral’s capabilities.

Foreign markets are the obvious route for expansion, but the price comparison model has not yet taken off in the same way in other countries.

Creating superior performance by grinding out lots of small opportunities is hard work.

The Welsh-based Admrial staff are sponsors and enthusiasts of rugby. As a business metaphor, Admiral has had the flair of the Welsh rugby team.  

But the future will be a loss of that flair, instead, for the former England coach Clive Woodward’s strategy of workmanlike improvements on small margins. After all, he did win the World Cup.