Insurer’s ability to weather bodily injury storm questioned

Motor insurer’s Admiral’s stock price is “defying gravity” after increasing following the release of its third-quarter interim management statement, according to Shore Capital analyst Eamonn Flanagan.

As a result of a 4% increase over the past 10 days, Admiral is currently valued by the market at around 25 times Shore Capital’s full-year 2010 earnings-per-share estimate of 68.1p. Flanagan said that the stock is “extremely vulnerable” to a major drop if there is any hint of deterioration in either Admiral’s combined ratio and/or ancillary profits.

Flanagan is detecting “increasing incredulity” in the insurance market about Admiral’s apparent ability to walk on water – in other words avoid the growing losses from rising bodily injury claims being made by its peers.

“Whilst we accept that an insurer can ‘buck the trend’ with a small, cherry-picked portfolio, we are much more sceptical when the insurer grows to a roughly 8.5% market share, with 2.3m vehicles.” Flanagan wrote in a research note.

Shore Capital also has concerns about the multiple the market will attribute to Admiral’s earnings should ancillary profits reduce.

Flanagan points to two events which could put pressure on ancillary profits: The Jackson review of civil litigation costs, which could reduce insurers’ income from referral fees and credit hire fees, and the UK government’s round of cost-cutting, which could limit individuals’ spend on ancillary products.

“As a consequence, with the stock defying gravity, in our view, we reiterate our sell recommendation,” Flanagan wrote.

Flanagan added that at its recent presentation, Admiral was “cagey” about the future of its German operations, and that he would not be surprised if the company closes or sells its German operations in the near future.

Admiral Q3 turnover up 50% - click here to read.