Admiral is more a customer service specialist than a traditional insurer. Indeed, in the first half of 2010 (H1/ 10) only 18% of profit before tax came from underwriting. The lion’s share was derived from selling ancillary products (50%), such as legal, personal accident, car hire and breakdown cover, together with receiving agency commissions (28%) from re-insurance partners. This is a nice position when the market is on a tear, especially if it can keep driving down costs.
In H1/10 the group duly reported some sparkling numbers, thanks to a 22% jump in prices and a 23% rise in volumes. Competitors helped by cutting capacity after the credit crunch and pushing up premiums. Agency commissions have rocketed 62%, while the contribution from ancillary services has also ticked up.
But with government austerity measures and higher taxes coming, I can’t see this benign environment lasting. For an early warning sign, note that the firm’s price comparison site, Confused.com, is already losing market share. Any valuation must price in the risk of tougher economic conditions and competitors re-entering its space. I’d rate the core insurance division on a price-to-book ratio of 1.5. For the Confused.com site I’d use a 12 times earnings before interest, tax and amortisation (EBITA) multiple and for the ancillary and agency commissions divisions, a ten-times multiple. In total the firm is worth about £2.8bn, or £10.50 per share – 35% below today’s level.
Admiral (LSE: ADM), rated a BUY by Redburn Partners
As such, a p/e ratio of 24 is too rich. Given the added risk of contagion from the recent rise in bodily injury claims at competitors, I’d jump ship.
Recommendation: SELL at £16.47
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments