EUR 850.00 For Business Accounts Only

Morningstar | Admiral 1H: Good Results, but Market Still Misses Strategic Weakness of This Business; Overvalued

Admiral reported first-half 2018 profit before tax of GBP 212 million, pretty much on the nose of our estimate. We are maintaining our GBX 1,660 per share fair value estimate and no-moat rating.

Turnover has increased on the comparable to GBP 1.66 billion, with underwriting profit also quite a bit higher, at GBP 93.4 million versus GBP 88.9 million in first-half 2017--hence the share price rally today. Investment return and profit commission were both flat, and there was a small GBP 4 million net interest income from Admiral loans flowing through the income statement, but that’s not worth writing home about.

We think the main item of improvement is the net other revenue and expenses for insurance, which increased by over GBP 25 million, and thus is one of the main contributors to the increase in profit, because the same noninsurance line item increased by negative 10 million.

Admiral results are still not presented in a clear fashion, but we surmise that this increase in insurance net other revenue and expenses, as not an underwriting profit, is driven by ancillary business. Moreover, in the United Kingdom, profit commission and other income was up GBP 20 million to GBP 145 million.

We outlined at our initiation on Admiral that we simply do not like this ancillary business that seems to be driving these "new age" United Kingdom generic home and motor insurers. This is a crowded space, and establishing profit growth by selling windscreen cover of third-party providers through price comparison websites, attached to underlying insurance policies, seems like a bad idea. We are also concerned that the U.K. financial services authority may wade into this industry, ancillary and PCW, at some point.

And in "beyond Admiral", Admiral is moving into unsecured personal loans and car financing. We are getting a bit concerned about the future direction of this business.

Finally, either Admiral’s reserving policy is absurdly conservative, or the business is reporting releases in a misleading way. First-half reserve releases above the long-term average of 15% is quite honestly senseless. We surmise that this includes figures coming from its co-insurance and reinsurance relationships that far outweigh the portion of insurance that Admiral retains, which leads to scepticism regarding the comparability and reliability of other metrics.