EUR 850.00 For Business Accounts Only

Morningstar | Admiral Still Too Rich and Operates a Vulnerable Business Model. See Updated Analyst Note from 18 Mar 2019

Admiral reported profit before tax of GBP 480 million for full-year 2018, above our full-year estimate of GBP 440 million. However, the result has been significantly flattered by a change in the Ogden discount rate assumption from negative 75 basis points to zero. The total impact of this change is around GBP 120 million, GBP 65 million of which has come through in this year’s results in the form of pretax reserve releases. GBP 55 million is expected to come in the coming years. We are increasing our fair value estimate to GBX 1,800 per share from GBX 1,660 to account for the time value of money, but our bearish view on the stock is based on our negative outlook for the U.K. underwriting cycle, ancillary income, and price-comparison websites. We also maintain our no-moat rating.

The final dividend being proposed to the board is GBP 66 per share, which includes a GBP 16.6 special. Normalising for the special, Admiral has a rough, and stable, 65% post-tax earnings payout ratio and 3% dividend yield.

Ultimately, the numbers are mixed, with value over volume being the main theme, in our opinion. In the U.K. insurance division, the number of cars insured rose by 650 basis points to 4.1 million, but this shows a general trend of slowing car volume growth, which is bolstered by van numbers having increased by nearly 100% to 230,000. And while other revenue per vehicle came in at GBP 67, this is still well below highs of GBP 84, or what we think is a normalised high of GBP 78 per vehicle. We expect this to drop further.

On an unadjusted basis, the reported loss ratio was 92.9% and 68.2%, including reserve releases. However, adjusting for the Ogden impact, there has been even more significant deterioration to 107.2% and 82.6%, respectively, on a base of 85.3% and 63.8% for 2017 loss ratio excluding and including reserve releases. Reserves over premium and the trend in reserve releases within the triangles also point to a deterioration in the underwriting cycle. Management has said the deterioration in underwriting profit is attributable to a combination of worsening large bodily injury experience and continued inflation of damage claims, both of which we think are of limited impact compared with the actual change in the reported loss ratio. Premiums have declined by 3% on the comparable 2017 period and by 6% on the platform for the same period.

The business has entered into an affinity partnership with Ford, which we expect to lead to a worsening expense ratio.

Profitability of both the international business and price comparison segments has improved, but they are a long way from being meaningful contributors.