Admiral is the UK’s third-largest motor insurer behind Royal Bank of Scotland and Norwich Union, owning Admiral, Diamond, Bell, Elephant, Gladiator and Confused.com. This is the country’s most popular website for comparing financial products from a range of insurers – it serves about 40% of the market and generates 16% of the group’s profits. The bulls conclude that Admiral is a low-cost provider, enjoying strong positions in a relatively stable sector, and so should be ideal for the more defensive investor. But don’t be fooled. It’s not all plain sailing.
Admiral (LSE:ADM), tipped as a BUY by The Mail on Sunday
With interest rates currently at all-time lows, Admiral’s investment returns will be hit, particularly in the case of its fixed-income bonds, which are tied into Libor (one of the key interest rates at which banks lend to each other). And with fewer people buying new cars, there will be less demand for some of its more expensive products, such as comprehensive cover.
Furthermore, Admiral is not actually a traditional insurer. It is more of a hybrid, because it only underwrites around a quarter of the policies that its sells (representing 20% of profits) – ceding the rest to third parties, such as Munich Re. For these passed-through-premiums, the company earns an agency commission (14% of profits). It also tacks on related ancillary services (50% of profits), such as breakdown, legal and car-hire cover. So for valuation purposes we need to determine a sum-of-the-parts figure for the entire organisation.
Just what is each unit worth? I would rate the core insurance unit on a price-to-book ratio of 1.2, equating to £310m. As for the Confused.com website, which competes in a cut-throat arena against rivals such as Moneysupermarket, GoCompare and People’s Champion, I would rate it on a ten-times multiple, or around £300m.
Finally, we come to the heart of the business – the selling of ancillary products and agency commissions. Typically, for every policy sold Admiral makes an extra £71 per vehicle from add-on services. This margin looks far too rich for these types of commodity-like products, particularly during a recession, and will inevitably come under attack. As such, I would rate these operations on a maximum of eight-times profits, or around £1bn.
In total, the whole shebang is worth about £1.6bn, or 620p per share – more than 30% below today’s share price. Sure, Admiral is a sound business, but in line with recent director sales I would advise shareholders to get out now. Preliminary results are due out on Tuesday 3 March.
Recommendation: SELL at £9.00
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments.