Company Reports

For the first half of 2024, we think Admiral has reported very good results. The business' total customer numbers have grown by 8.2% since the end of last year to 10.5 million. A lot of that growth has been driven by the UK motor business. The combination of higher customer numbers and rise in premiums the business established over the last few years has resulted in an over 30% rise in insurance revenue, and a similar rise in profit before tax. That profit before tax performance of GBP 309.8 million over the interim places the business well against our GBP 496.3 million full-year forecast. Along with the GBX 77.50 of earnings per share, Admiral has declared a GBX 71.00 per share dividend, made up of 65% of pretax profit, plus a special dividend of GBX 19.70 per share. Return on equity has risen from 39% to 45% half on half. We maintain our GBP 30.70 per share fair value and our narrow economic moat.

For some, if not many investors, dividends are important. This is no less the case in European insurance. However, while investing for dividends can seem straightforward, we think there is more to it than just hunting for stocks that provide the highest yield. Within our European insurance list of 18 companies, we recommend Admiral, Allianz, Munich, and Zurich as the best options for investors looking for a solid, stable, reliable, and real yield. In establishing this list, we rule out companies that have had a track record of omitting dividends and those that have frequently made dividend cuts that we think are meaningful.

Admiral is a rare example of an insurance company with a narrow moat.

For 2023, Admiral reported profit before tax of GBP 442.8 million, or GBX 111.20 in earnings per share, and a GBX 103 per share full-year dividend. These stack up slightly lower than our respective estimates of GBP 468.6 million, GBX 117 per share, and GBX 105 per share, which were based on IFRS 4. The new accounting standard resulted in lower profit in UK motor in 2022 for comparison. Consensus estimates per LSEG were for GBX 116.60 in earnings per share and GBX 107.60 for a dividend for 2023. The proposed final dividend to be paid is GBX 52 per share, made up of a normal dividend of GBX 35.40 per share equal to 65% of post-tax profits and a GBX 16.60 per share special dividend. Admiral shares will trade excluding this final dividend from May 9, with May 10 as the record date. The final dividend will be paid June 10. The group’s solvency ratio at the end of 2023 stood at 200%, a rise of 20 percentage points on the prior year. This increase is predominantly a result of a rise in operating capital generation, in particular from UK motor. Sensitivities remain broadly unchanged. Total cash at the end of the year was GBP 353.1 million. We maintain our fair value estimate and narrow moat rating.

We believe the announcement on Feb. 9 that the U.K.'s Financial Conduct Authority has agreed with the majority of the market to halt guaranteed protection of asset policy sales is a good thing and improves the unknown conditions surrounding these companies. Guaranteed asset protection has been sold to insurer policyholders against the difference between the initial purchase price of a vehicle and the outstanding value. The FCA's complaint stems from its findings that only 6% of the amount customers pay in premiums for guaranteed asset protection policies is paid out in claims. The regulator’s bone of contention is that it does not offer value for money. This marks the third intervention by the regulator into personal insurers, following general insurance pricing reforms and an investigation into premium financing. We think these investigations are coming to an end. We maintain our fair value estimates and moat ratings for Admiral and Direct Line.

With the recent announcement that the Financial Conduct Authority is investigating premium finance used to pay for insurance premiums, we believe the share price reactions of U.K. personal lines insurers in the market Jan. 10 are exaggerated and the shares of Direct Line and Admiral remain undervalued. Of the two, we prefer Admiral because we believe the company is less exposed to any future regulator action. While some news in the market has discussed double-digit premium finance rates that have fallen marginally over recent years, we think Direct Line has been charging around 4.5% last year in its motor book and 3.1% in its home insurance book, much lower than the rates being discussed in the media. In its rescue and other personal lines business and its commercial business, Direct Line has historically been charging very low-single-digit rates. If we converge these premium finance interest rates to a long-term rate of 2%, assuming the Bank of England bank rate will fall long term to this rate, we arrive at a fair value estimate for Direct Line at something in the region of GBP 1.95 per share. We believe Admiral is less exposed to any future action because across its entire U.K. business we think it has been charging premium finance rates of around 3.75%—much lower than the current base rate of the Bank of England. If we perform the same exercise on Admiral, converging these premium finance rates to 2% long term, we arrive at a fair value estimate for Admiral at something in the region of GBP 27.7 per share. We therefore believe both Admiral and Direct Line are undervalued.

Admiral is a rare example of an insurance company with a narrow economic moat. Its durable competitive advantage is built on its proprietary technology intangible assets. Admiral’s investments in proprietary tech have created returns that far exceed anything generated by peers, and it has done so on a maintainable and reliable basis. These investments range from IT hardware and software to data; Admiral’s latest round of investments have been in probability-based machine learning that has then been customized by the firm. This internal development and customization of technology to make it proprietary is the reason for Admiral’s market-leading profitable growth. Using its technology and data, Admiral has been able to select the most profitable risks. Furthermore, we think this latest round of investments in artificial intelligence means Admiral is well placed to drive improvements in its motor and home loss ratios. This is because Admiral has historically selected drivers that pay by credit card, and one of the utilizations of probability-based learning is to more accurately predict fraudulent claims. This is done through analysis of interdependence between credit-based data features, which Admiral Loans is only likely to strengthen.

Admiral has announced the acquisition of Royal Sun Alliance’s U.K. direct home and pet insurance business. The purchase price is currently GBP 82.5 million, but the terms of the agreement mean there could be an additional GBP 32.5 million payment added to this, depending on the number of policies migrated. The acquisition is expected to close in the later part of next year’s first interim. While small, the acquisition is not insignificant, bringing in around GBP 165 million in gross premiums written, adding around 5% to Admiral's premiums. We maintain our EUR 30.7 per share fair value estimate and our narrow moat rating.

At a broad level, we believe Admiral has reported results for the first six months of the year that are in line with our full-year forecasts. However, the shape of the results within each line of business is different from what we have forecast. Admiral has delivered profit before tax of GBP 233.9 million year to date, or GBX 57.6 in earnings per share, versus our GBP 468.1 million and GBX 1.16 in profit before tax and earnings per share for the full year, respectively. Admiral’s year-to-date figures imply a profit before tax and EPS of GBP 467.8 million and GBX 1.15. We think that EPS is however below that of the GBX 123.47 as per Refinitiv collected consensus. With shareholders’ equity of GBP 928.6 million, Admiral has delivered a 39% return to shareholders, higher than the 36% return on equity delivered in last year's first six months. That means Admiral is currently looking a lot better than our 35.2% full-year ROE forecast. We apply a 9% cost of capital to Admiral and so we maintain our rating of narrow economic moat. We also maintain our GBP 30.7 per share estimate of fair value as we look to be about right on our full-year forecasts.

Admiral has announced the acquisition of Luko, a French online home insurer that captures 25% of online home insurance sales in France. While the acquisition does not have an impact on our GBP 30.70 fair value estimate for Admiral, we believe it highlights the business’ commitment to growth in its international segment. The transaction does not include Luko’s real estate, German, or Spanish operations. We maintain our narrow moat rating.

Admiral is a rare example of an insurance company with a narrow economic moat. Furthermore, Admiral’s maintainable competitive advantage is built on its proprietary technology intangible assets. Admiral’s investments in proprietary tech have created returns that far exceed anything generated by peers, and it has done so on a maintainable and reliable basis. We think these investments range from IT hardware to software to data and Admiral’s latest round of investments have gone into probability-based machine learning that has then been customised by the firm. This internal development and customisation of technology, to make it proprietary, is the reason for Admiral’s market-leading profitable growth. Using its technology and data Admiral has been able to select the most profitable risks. Furthermore, we think this latest round of investments into artificial intelligence means Admiral is well placed to drive improvements in its motor and home loss ratios. This is because Admiral has historically selected drivers that pay by credit card and one of the utilisations of probability-based learning is to more accurately predict fraudulent claims. This is done through analysis of interdependence between credit-based data features, which Admiral Loans is only likely to strengthen.

When looking at the exposure of insurers to the unfolding banking crisis, we believe this is limited. The main impact of the crisis currently seems to be contagion, so investors are selling shares cheaply. However, exposure to United States bonds is either in government bond securities, or exposure to Credit Suisse, Silicon Valley Bank, and other U.S. regional banks is immaterial, which is 50 basis points or less of their investment portfolio. Some do hold larger bank debt holdings of up to 5.5% of shareholder investments, but nearly all that debt ranks as senior. AT1 debt tends to be very minimal or there is no exposure as a policy with board-level approval. The vast majority of corporate debt held is investment-grade. We maintain our fair value estimates and moat ratings across our European insurance coverage. Allianz remains our Best Idea. Admiral is one of our top picks.

On March 8, Admiral reported numbers for full-year 2022. The market has reacted badly to these. While they are a little off our forecasts, we think shares remain undervalued. Having rolled our model, we lower our fair value estimate to GBP 33.0 per share. We maintain our narrow economic moat rating.

Admiral is a rare example of an insurance company with a narrow economic moat. Furthermore, Admiral’s persistent competitive advantage is built on its proprietary technology intangible assets. Admiral’s investments in proprietary tech have created returns that far exceed anything generated by peers, and it has done so in a persistent and reliable way. We think these investments range from information technology hardware to software to data and Admiral’s latest round of investments have gone into probability-based machine learning that has then been built bespoke. This internal development and customisation of technology, to make it proprietary, is the reason behind Admiral’s market-leading profitable growth. Using its technology and data Admiral has been able to select the most profitable risks. And furthermore, we think with this latest round of investments into artificial intelligence, Admiral seems well placed to drive improvements in its U.K. motor loss ratio. This is because Admiral has historically looked to select drivers that pay by credit card and one way to utilise probability-based learning is to predict fraudulent claims more accurately. This is done through analysis of interdependence between credit-based data features, which Admiral Loans is only likely to strengthen.

Many European insurance companies have fallen into 5-star territory year to date. However, we still like and support our preferred picks of two primary firms. In our personal lines subindustry, we still like Admiral. That is because we believe the business is adept at growing its customer numbers ahead of peers and the market. Though we do anticipate slower motor insurance growth over the immediate time frame, coupled with a fall in home insurance volumes due to lower U.K. completed home sales, we still believe in the prospects for Admiral’s long-term growth. Yet, while the business clearly outstrips the competition in terms of expansion, its development is not aggressive. Admiral has grown its U.K. motor market share by 5 percentage points over the last 10 years.

Having digested Admiral’s first-half 2022 results and revisited our assumption, we are raising our fair value estimate from GBP 35.0 to GBP 36.4 per share.

Admiral is a rare example of an insurance company with a narrow economic moat. Furthermore, Admiral’s persistent competitive advantage is built on its proprietary technology intangible assets. Admiral’s investments in proprietary tech have created returns that far exceed anything generated by peers, and it has done so in a persistent and reliable way. We think these investments range from information technology hardware to software to data and Admiral’s latest round of investments have gone into probability-based machine learning that has then been built bespoke. This internal development and customisation of technology, to make it proprietary, is the reason behind Admiral’s market-leading profitable growth. Using its technology and data Admiral has been able to select the most profitable risks. And furthermore, we think with this latest round of investments into artificial intelligence, Admiral seems well placed to drive improvements in its U.K. motor loss ratio. This is because Admiral has historically looked to select drivers that pay by credit card and one way to utilise probability-based learning is to predict fraudulent claims more accurately. This is done through analysis of interdependence between credit-based data features, which Admiral Loans is only likely to strengthen.

Admiral delivered a near 20% rise in operating profit to GBP 257.2 million in the first half versus the prepandemic comparable period of 2019. This was driven by a combination of business growth, pricing, and underwriting. While Admiral estimates around 11% claims inflation in the U.K. motor market, it raised prices by 16% for the back end of the second half. Yet, management expanded the business with a 3.4% rise in vehicles insured. Admiral looks to be well ahead of the market in terms of pricing and growth. The drivers of claims inflation have not changed, with a normalisation of U.K. driving patterns and a rise in the prices of used cars. Labour shortages and wage inflation are also adding pressure to the cost of claims and repairs. However, Admiral has outlined a policy of margin over growth for the second half and said there are signs that secondhand-car prices may start to decline in the second half. The broader U.K. business showed 10.6% growth in households insured, as we believe it continues to take share from others.

Sabre reported results for the first half of 2022 that highlighted a difficult United Kingdom market. The key issue is claims inflation. While in 2021 claims inflation was 8%, this rose to 10% in the first quarter of this year and has now reached 12%. This is across car parts, labour, credit hire, and car values. Sabre has tried to offset this claims inflation through price increases ahead of the market, and this has led to a reduction in motor insurance policies count and gross written premiums. However, we think the real issue has come in the strengthening of reserves to support claims coming through. That has led to a nearly 27-percentage-point deterioration in the loss ratio. Where the top line declined by 10%, we think this strengthening of reserves is the cause of the 80% decline in pretax profit. Sabre’s shares fell by 40% in July 14 trading, with Admiral and Direct Line also falling by between 10% and 20% in an industry read-through. We are holding our fair value estimates for Admiral and Direct Line steady because if we push the motor insurance loss ratio up to 100% for this year, the change does not have a material impact on our fair value estimates. Our estimates already include a significant deterioration in this year’s loss ratio, 8 percentage points higher than last year. We have forecast further erosion of the loss ratio in 2023 before an improvement back to this year's elevated level. Our estimates include a deteriorating operating environment over three years.

Admiral typically invests more in proprietary technology than nearly all U.K. personal lines insurers and has a strong track record of generating economic returns from doing so. Admiral’s investments in proprietary technology are what drive the company’s intangible assets based narrow economic moat. While most insurers invest for defense of market position or growth, Admiral has demonstrated that in building out its proprietary technology and customizing it bespoke, the company can generate market leading motor insurance loss ratios while concurrently outstripping the U.K. motor insurance market growth.