Admiral Plc – The “Different” Insurer

This article contains some brief notes on Admiral Plc, an UK insurance company listed on London Stock Exchange with the tickercode ADM. It’s included in FTSE-100.

The business:

Admiral was formed in 1990 with Henry Engelhardt as the main founder. It was listed/floated in 2004 with a valuation of 700 million GBP. Today’s market cap is 6.9 billion GBP.  Engelhardt was CEO until 2015 when he “stepped down” to become chairman. He was replaced by David Stevens.

Admiral offers UK motor and household insurance in addition to the comparison website Confused.com and some other small services. Outside of the UK, Admiral owns four insurance businesses and six comparison businesses.  It has nearly 7 million customers and employs over 11,000 staff globally.

Insurance is a very competitive industry where the profitability is dependent on two factors: underwriting and investments/float. The industry is very competitive and often leads to “hard” and “soft” markets. The investment part is not as profitable as it used to be because of the low interest rates (most insurers invest in bonds).

Facts:

Below is a summary of the most important metrics:

Million Profits Loss Expense Combined
Turnover customers before tax EPS DPS ROE ratio ratio ratio
2006 711 1.29 147.3 39.8 36.1
2007 825 1.5 182.1 48.6 43.8
2008 910 2 202.5 54.9 52.5 57
2009 1080 2.1 215.8 59 57.5 54
2010 1585 2.7 265.5 72.3 68.1 59
2011 2190 3.4 299.1 81.9 75.6 59
2012 2215 3.6 344.6 95.1 90.6 60
2013 2030 3.7 370.2 104.6 99.5 58
2014 1.97 4.05 356.5 102.8 98.4 52
2015 2.12 4.43 376.8 107.1 114.4 49 65.1 20.5 85.6
2016 2.58 5.15 389.7 78.5 114.4 49 72 22.4 94.4
2017 2.96 5.73 405.4 117.2 114 55 66.2 21.7 87.9
2018 3.28 6.51 479.3 137.1 126 56 67.3 22.9 90.2
2019 3.46 6.98 526.1 148.3 140 52 64.9 23.7 88.6

As we can see the numbers are pretty good with growth all over the place.

What are the factors driving the very solid growth? Let’s look at them one by one:

Management and skin in the game:

Management and employees own a significant part of the company. Henry Engelhardt, the founder and now Chairman, still owns about 10%.  CEO David Stevens owns 3%. Both Engelhardt and Stevens have a low salary (relative). The alignment between management and outside shareholders should be aligned.

Admiral has an annual bonus program for employees that allows employees to share in company profits.  Every worker receives up to 3,000 GBP of free shares in Admiral stock each year, giving them a real interest in the operations. “Everybody” at Admiral is a shareholder.

The biggest shareholder is Munich Re, which ultimately takes much of the liabilities of Admiral’s underwriting.

Culture:

I believe a strong internal culture is the best moat there is. A culture is very hard to replicate. Admiral scores well on both employee and customer satisfaction. The view is very long-term and focus is on profitability, not market share or other goals. As mentioned, most employees have a real interest in running the operations are well as possible.

The business model:

The business model was unique when Admiral was founded, and they have continued to sharpen their focus. For 20 years they have developed their internet services and price comparison sites. Admiral has managed to build scale by diversifying their business abroad. This has resulted in a massive cost advantage as evidenced by the expense ratio in the table above. They underwrite for less costs, almost at par with the very profitable Nordic insurers (but the Nordics operate more like an oligopoly). Much, if not all, of the cost advantage are passed on to the customers (and the shareholders in the form of profits).

Admiral is based in Cardiff where both rent and salaries are lower than in London or other big metropolitan ares.

Reinsurance:

To manage risk and increase the return on capital much of the liabilities are reinsured and transferred to co- and reinsurance partners. Besides having to put op less capital for liabilities, it also provides support if things go wrong.  This means Admiral gets a fee for writing the premium but the actual liability for any claims are transferred to another insurer. Munich Re, the world’s biggest reinsurer, underwrites about 35% of Admiral’s car insurance. As mentioned, Munich Re is the biggest shareholder with 10.2% of the shares. To my knowledge Admiral only takes on 25% of the liabilities they underwrite themselves. Other reinsurers are Hanover Re and Swiss Re (among others).

Investment income:

Admiral cedes most of its insurance and thus has a lower portion of their profits from investments. This means low interest rates are of less importance for Admiral.

Price dissemination:

Admiral runs several sites which compare premiums. Admiral uses price comparisons extensively and this has been a driver for their growth. In the UK brand recognition is of less importance compared to price (unlike the Nordics). When you have the lowest expense ratio it goes without saying Admiral sticks out favourably on such sites.

A history of profitability:

The insurance market is very competitive. Very few insurers manage to make a decent return over long periods of time, but Admiral is one of these. You need to know how to value risk and have the discipline to stay away from unprofitable underwriting. That is not as easy as it sounds. You need a culture which motivates long/term decisions.

Innovative:

Part of the profitability has come from innovation. Admiral shifted from telephone to internet, and now later to comparison sites.

Shareholder distributions:

The capital allocation is pretty simple: nearly all profits are handed back to shareholders in the form of dividends. Little is reinvested in the business, and this means dividend investors might be attracted to the stock.

Valuation:

Admiral is currently not expensive if we compare to the historical PE ratio:

Admiral Plc historical PE ratio. Source Yahoo!finance and my own calculations.

Considering they have little liabilities in their balance sheet and their history of consistent growth, I would say the valuation is on the low side.

Risk:

There are of course many risks for an insurer, but the biggest risk for Admiral is a stop in the support from reinsurers. Any lack of support means Admiral needs to set aside more capital for future liabilities.

 

Disclosure: I am not a financial advisor. Please do your own due diligence and investment research or consult a financial professional. All articles are my opinion – they are not suggestions to buy or sell any securities.  

(This article was published on the 15th of July 2020.)

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