Description

Admiral is the largest auto insurance company in the UK with ~14% market share. I’m recommending it as a long.

Think of Admiral as the GEICO of the UK. They operate a direct-to-consumer business model which, combined with a cost-focused culture, gives them a cost advantage over competitors. This cost advantage allows them to both 1) generate high profits and 2) gain market share over time.

For an insurance company, they operate a capital-light model, reinsuring the majority of the premiums under favorable terms that allow Admiral to keep a favorable share of the profits per policy. They then dividend out the majority of profits each year to shareholders.

For years, they’ve tried to expand into other geographies besides the UK, but those efforts haven’t been terribly successful. Substantially all of Admiral’s profits continue to come from UK motor policies.

But they’ve been so good in their core UK motor business that they have been a compounder historically:

I think now is an especially good time to own Admiral. Admiral’s stock price has underperformed this year as some of Admiral’s competitors have posted disappointing underwriting results and cut guidance; the culprit is claims inflation that is impacting margins.

Admiral is not immune to the pressure on claims costs; as you can see from some of the charts above, their ROE and EPS over the LTM period ending 6/30/22 is running below trend. But I don’t see any reason why this won’t ultimately end up being a temporary issue as the classic insurance cycle runs its course (combined ratios worsen => insurers raise prices => combined ratios improve => insurers don’t raise prices enough => combined ratios worsen, etc. etc.)

In the meantime, while that cycle plays out, one can buy Admiral at a lower than usual multiple (P/B currently <6x vs ~8x avg; market cap per UK motor policy currently ~€1300 vs ~€1500 avg):

As the insurance cycle plays out and as forward estimates for Admiral return to normalized levels of profitability, my guess is that Admiral’s valuation will return to historical average levels. Meanwhile, as we wait for that to happen, Admiral will likely continue to gain share, grow book value per share, and pay out meaningful dividends.

Catalyst

1) Insurance cycle plays out =>Admiral returns to normalized levels of profitability => valuation multiples revert to prior levels

2) Admiral continues to gain share, grow book value per share, and pay out meaningful dividends