While not as badly hit as other motor insurers, company says reserves are drying up

Henry Engelhardt

Admiral’s third-quarter profit warning has cast a pall of uncertainty over the company’s future performance and sent its stock plummeting. But the company is unlikely to plunge into loss-making territory, unlike some of the motor insurers that have suffered bodily injury reserving problems.

Admiral revealed last Wednesday that its full-year 2011 profit would be 10% up on 2010’s £265.5m, disappointing analysts. Shore Capital’s Eamonn Flanagan, for example, expected a 17% profit growth in 2011, and Oriel Securities analyst Marcus Barnard said the fact that Admiral’s stock was trading at 17 times earnings before the announcement implied an annual profit increase of 15%-20%.

Admiral stock fell 34.4% to 887.50p on the day the results were announced. At the time of going to press, the stock was trading at 820.94p. Admiral’s senior executives and their families have responded to the decline by buying shares. The largest transaction - one million shares at 874p a share - was made by Admiral chief executive Henry Engelhardt’s wife the day of the results.

Admiral missed analysts’ expect­ations because of rising bodily injury claims, prompting reserve strengthening for both the 2010 and 2011 years. Admiral warned that it would not be able to release any reserves in the second half of the year if bodily injury trends persisted.

The company said in its presentation that claims above £100,000 represented 26% of premium in 2010, compared with 15% in 2008.
“We do not have much clarity about where this company is going or about the profitability of the recent business it has taken on, because they have attributed this profit warning to 2010 and 2011,” Barnard told Insurance Times. “We still have concerns about the reserve adequacy of the 2007, 2008 and 2009 years.”

Shore Capital’s Flanagan said in a note there were “real vulnerabilities” to Admiral’s earnings forecasts in the coming years thanks to bodily injury claims, profit commissions, referral fees and ancillary income. This means the stock market will struggle to value the company, he said.

The profit warning has been particularly confounding for the market because Admiral had previously appeared to be either immune to bodily injury claims trends or have them under control.

In its first-half 2010 results, the company noted that while other companies had blamed worsening results on rising injury claims, “Admiral’s claims experience over the past 18 months has not included any unusual trends in bodily injury or damage claims.”

Despite this, Barnard does not expect Admiral to become unprofitable. “I would be surprised if Admiral made a loss,” he said. “I assume it would have to rebuild reserves for a couple of years, which would depress profitability.”

Admiral declined to comment.

Pass notes: Admiral

What are the implications of Admiral’s unique structure?

Worsening underwriting profitability for Admiral could mean a double hit: it would reduce the profitability of the business it retains, but also the profit commissions it receives from ceding business to its panel of reinsurers. Admiral retained 27.5% of its UK business in 2011. Profit commission made up 27% of the company’s first-half profit before tax.

What are the prospects for the rest of Admiral’s earnings streams?

Underwriting profit only accounted for 13% of Admiral’s first-half profit. The company’s ancillary income, which makes up 54% first-half profit, potentially faces pressure from the Office of Fair Trading review, the crackdown on referral fees and the economy - consumers may be less inclined to buy add-ons to their policy if they have less money to spend on insurance.

When did Admiral’s troubles first become apparent?

Equity analysts have suspected for some time that Admiral would come unstuck: Shore Capital’s Eamonn Flanagan accused the stock of defying gravity in a research note this time last year. The difficulties first showed up in Admiral’s first-half 2011 figures, when worse than expected bodily injury claims whittled Admiral’s reserve releases down to just £4m from £17.3m in last year’s first half.

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