Slow growth in international markets and a declining rate of growth in the motor business means the once fast-growing firm is failing to impress as it used to

For investors, Admiral has long been a FTSE darling thanks to a rising share price and dividend on the back of  stellar customer growth. But this era is ending, analysts believe.

The share price is overvalued and Admiral is now part of the UK motor insurance furniture, rather than a rising star. Concerns grew after the company’s 2018 results. Profits increased 18% to £476.2m, but this was buoyed by up to £140m in Ogden reserve releases – meaning it missed analysts’ expectations – and the shares fell 4%.

“Admiral is now a mature incumbent rather than a fast-growing challenger,” said Shore Capital equity research analyst Paul De’Ath. “The growth in motor continues to slow and the home and travel businesses both delivered small losses during the year. The international and price comparison businesses are slightly better than expected, but the size of the UK motor book in relation to the whole group outweighs positives elsewhere.”

International growth disappoints

Admiral had hoped international business would balance out the inevitable slowdown in UK motor. In 2014, founder and former chief executive Henry Engelhardt told Insurance Times of his big ambitions for European expansion. 

He said: “The 23-year-olds in Rome, Austin, and Toulouse are using the internet for everything and they will use it to buy car insurance. They are all agent-delivered markets. We are sitting on what I believe to be an obvious distribution switch.”

But, five years later, Admiral’s foreign operations made a £1.1m loss in 2018. Engelhardt’s predictions have not happened, largely because Europeans still use brokers. In the UK, direct insurance makes up 60% of purchases. In Europe, it is a fraction of that. 

Berenberg analyst Iain Pearce said: “While the Italian market continues to display positive trends, Admiral is unlikely to be able to disrupt European markets in the same way it disrupted the UK market in the early 2000s.”

Meanwhile, US growth is not having a significant impact on bottom line. Admiral took an impairment valuation on Elephant, its US motor insurance business, and, its US price comparison website, last year.

Back in the UK, Admiral has tried to diversify into travel, van and even loans. But home and travel made a loss in 2018, van is becoming increasingly competitive and loans have only just begun. Added to all this, Admiral could face diminishing reserve releases, putting added pressure on profits.

“Reserve releases will eventually begin to normalise as recent underwriting years are unlikely to be as profitable as in the 2010-2013 period,” says Pearce.

Strategy on course

However, Admiral chief financial officer Geraint Jones is confident the strategy is right. He stressed that Admiral now has around 15% of the UK motor book and argued that, while the rate of growth is naturally slowing, it is still strong.

“In 2018, we grew UK motor nearly 10% in customers. When you are that size, it’s not a bad rate of growth at all,” he said. 

Jones admitted European and US direct buying has not taken off like it did in the UK at the turn of the millennium, but said Admiral is investing in acquiring new US customers. He said the expense ratio will come down once typically loyal customers land on the books, resulting in increased margin and profitability. 

“We grew 10% in Spain, nearly 20% in Italy and more than one-third in France. The US was up over double digits. They are all growing quite nicely despite those challenging conditions,” he said.

But market watchers believe Admiral’s best bet of quickly impressing shareholders is through faster growth in UK home insurance. Home makes up around a quarter of rival Direct Line’s profits in an average weather year, compared to 1%-2% for Admiral. 

Jones said: “We have not really tried to cross-sell to our existing customers that hard until quite recently, with our multi-cover offering. Our hope is that we will be able to grow that business much faster than motor is likely to grow over the coming years.”

The final doubt is whether Admiral can sustain its level of reserve releases as the run-off enters a more choppy period of claims. Admiral is “very conservative” when it comes to reserving, said Jones.

The higher-claims induced profit warning in 2011 would have shaken out any complacency, boss Engelhardt said at the time. 

Jones said: “It’s probably fair to say our reserve releases won’t stay to the level where they’ve been in the last couple of years. Nonetheless, we would always take a cautious approach to reserves and so always expect reserves releases to be a meaningful, substantial part of our profitability.” 




What is Admiral’s reserving strategy?

Admiral reserves conservatively. It means that it takes the points on its loss ratio in the current year, but, if claims run-off is as expected, it can benefit in the following years with releases, improving the combined operating ratio. 

Why is there concern from analysts?

Berenberg believes Admiral will run into claims years that are more choppy and it will not be able to sustain the level of releases, thereby impacting profits.

Has Admiral ever got it wrong? 

In 2011, Admiral issued a profit warning on higher than expected claims and reserve strengthening for the 2010 and 2011 years. The share price dropped 20%. The then-chief executive Henry Engelhardt said the issue was more about inexperience in Admiral’s claims staff rather than reserving.

What is the big deal about reserving in general? 

Reserving is largely just a natural part of insurance claims management, but it can be controversial if insurer bosses release aggressively to hit various targets in a certain year. 

Another issue is when an insurer releases too much from a certain year, only to find out later that it needs to strengthen it in the event of an unexpected spike in claims from the released year. 

Apart from all that, some insurers can simply get the amount of reserving needed wrong, despite the influence of actuarial experts. Insurer Gable, which went into administration in 2016,is a good example and RSA Ireland had a scandalous level of reserving in 2013 which led to it being fined last year.

In a worst case example, reserving can be part of a fraudulent activity, as was the case with Independent Insurance.