Five analysts points of view on Admiral in 2011
James Shuck, Jefferies
“Recent negative large loss experience has improved in fourth quarter. Specifically, 2006-09 has seen more normal trends and 2010/11 a reduction in the frequency of large claims. This supports the ‘randomness’ argument over a potential ‘loss of operational control’. In addition, Admiral has conducted a 3rd party reserve review of large claims and this indicates improved adequacy. The 2011 ultimate loss has been revised upward to 74% (from 68% at first half year) but with greater reassurance over the outlook. The 2011 booked loss ratio was 82%, implying still 12 percentage points of known redundancy.
“Admiral was explicit about the potential for growth to slow. 2011 UK vehicle growth of 21% slowed to 2% in the fourth quarter, and management is guiding to 5%-10% in 2012, driven largely by price comparison and product innovation.
“We estimate flat industry rates in 2012, with Admiral probably increasing slightly above this. Assuming a more normal environment for claims inflation (5%-6%), we would therefore expect 2012 to show further improvement in the booked loss ratio of around 3 percentage points as higher premium earns through.”
Joy Ferneyhough, Espirito Santo
“The key comment for us here is that quarter two and quarter three 2011 were the worst quarters and that Q4 did see an improvement. No comment on how 2012 has begun but if management can prove that there was some randomness here and that reserving is under control, the reduction in volatility that this issue brings to reserve releases and profit commissions could bring comfort. However, given profit commission in the second half of 2011 was significantly below the first half of 2011 (£17m vs £45m first half year), we expect this relationship and outlook will be key to determining the upside/downside to current consensus.”
Greg Paterson, KBW
“We believe there are three key questions to consider in order for us to retain our outperformance recommendation on Admiral: Firstly, whether management have ‘kitchen sinked’ the bad 2010-11 cohorts of business in terms of higher reserves; secondly, whether pricing was changed sufficiently to get rid of these bad cohorts for 2012; and, thirdly, whether Admiral can still grow vehicle numbers with these pricing changes implemented.”
Fangal Changazl, Nomura
“The focus of today’s results was primarily on claims experience, and we feel there have been encouraging developments in this regard.”
Credit Suisse research:
“A key feature of the second half of the 2011 results is the slowing of growth in UK vehicle count. While this may provide some ammunition for the bears, we believe it was a sensible (and directionally well guided) response from the company to emerging uncertainties on claims experience. Furthermore, we would highlight that annualised growth rates in third quarter and fourth quarter are estimated to have been 13% and 7% respectively - this is largely consistent with the 7% growth in UK vehicle count factored into our first year 2012 forecasts (and fading thereafter).
“On the other hand, we felt the message on claims development was a relief, with older claims showing signs of stability and an apparent decline in frequency in the fourth quarter. That the company is referring to 2011 ultimate year combined ratio expectations of 85%-90% as disappointing bodes well for earnings expectations given this is consistent with our high-80% UK combined operating ratio forecasts in 2012/13.”
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