Admiral’s investments in proprietary tech have created returns that far exceed anything generated by its peers

Business Strategy and Outlook

Admiral is a rare example of an insurance company with a narrow economic moat. Furthermore, Admiral’s persistent competitive advantage is built on its proprietary technology intangible assets. Admiral’s investments in proprietary tech have created returns that far exceed anything generated by peers, and it has done so in a persistent and reliable way. These investments range from information technology hardware to software to data and Admiral’s latest round of investments have gone into probability-based machine learning that has then been built bespoke. This internal development and customisation of technology, to make it proprietary, is the reason behind Admiral’s market-leading profitable growth. Using its technology and data Admiral has been able to select the most profitable risks. And furthermore, it is the latest round of investments into artificial intelligence, Admiral seems well placed to drive improvements in its U.K. motor loss ratio. This is because Admiral has historically looked to select drivers that pay by credit card and one way to utilise probability-based learning is to predict fraudulent claims more accurately. This is done through analysis of interdependence between credit-based data features, which Admiral Loans is only likely to strengthen.

Admiral has historically underwritten policyholders exhibiting higher risk. In its establishment, younger drivers and drivers based in London were all part of the business’ perimeter of nonstandard risks. On one side, Admiral’s historical preference for younger drivers further places the business at an advantage versus the rest. The live Financial Conduct Authority, or FCA, general insurance pricing rules aim to stamp out the practice of price walking, an activity that has been much more prevalent in older generations. Going further, Admiral’s latest round of investments add to its runway for success. Probability-based machine learning has high application when using inter-related data features to identify lower-risk policyholders within higher-risk datasets. Admiral’s perimeter of insuring urban-based nonstandard risk policyholders plays into this

Financial Strength

Admiral’s float investment strategy focuses on low-risk, low volatility, preservation of capital. Admiral typically does this by investing in government bonds, corporate bonds, private credit, cash and money market instruments. As at end-2021 Admiral held 69.3% of its full investment portfolio, excluding cash, in fixed income and debt securities. This has risen from 60.5% a few years ago. Admiral’s allocation to money market funds stands at 28.4% as at end-2021 and this is an allocation that the business has pared back from 35.9% since the same 2019 time frame. In full-year 2021 Admiral generated a 2.0% investment yield. In future it is anticipated that this will rise to 2.1% over 2022 and climb by 10 basis points on average per year until it reaches a long-term 2.5% rate. Across Admiral’s entire investment portfolio, also in 2022 the business will generate 0.7% of gains, with a 50% harvesting rate. It is forecasted these annualised investment gains will climb over the medium term to a long-term 1.4%. Admiral’s total long-term investment return will therefore settle at around 3.7%. On the surface, leverage appears to be one Admiral’s downsides. For example, up until 2013 the business looks like it performed well, maintaining financial prudence of zero debt level. In 2014 this debt started to rise with the July 2014 issuance of GBP 200 million in subordinated notes. These notes have a July 2024 redemption date and 5.5% fixed interest rate. Since 2017 Admiral’s leverage looks to have climbed but this is ultimately because of the 2017 formation of Admiral Loans. Since it was established, Admiral Loans has issued GBP 446.5 million in loan-backed securities that are backing Admiral’s sale of personal loans. Excluding this GBP 446.5 million as at end-2021, Admiral’s debt as a percentage of equity falls from 47.6% to 15.9%, which shows a much better profile. It is forecasted Admiral will reach around a 47.5% debt-to-equity level

Bulls Say’s

Admiral’s U.K. motor returns on new investment far outstrip anything achieved by peers, driven by its proprietary tech.
Admiral still only holds a 15.5% share of the U.K. motor insurance market with a big ensuing industry shakeout.
Admiral has a long runway for growth in U.K. home and international car segments, and significant room for improvement in these loss rates.

Company Profile

Admiral is a personal lines insurance company that operates predominantly in the U.K. Primarily, the business is a motor insurer with the U.K. motor and international car business accounting for over 95% of Admiral’s gross written premiums. The business also has a nascent but growing U.K. household insurance division. When Admiral started out in 1993 the business was established to sell motor insurance to nonstandard risk policyholders. These nonstandard risks included younger drivers, women drivers, drivers wanting to pay by credit card, and drivers based in London. Over the years Admiral has continued to expand its wheelhouse of nonstandard risk selection.

(Source: MorningStar)

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