David Stevens, the Admiral chief executive for the past three years, doesn’t use as many oblique analogies in his annual results statements as his predecessor Henry Engelhardt but he manages to get in plenty of exclamation marks.
In many ways that’s understandable: the world of motor and household insurance is replete with unexpected surprises, from unpredictable weather to abrupt changes in legislation, both of which can have a marked effect on profits.
Admiral was founded by Mr Engelhardt, 61, in Cardiff in 1993 as a single car insurance brand. Under his leadership the group expanded into household cover and overseas, where it operates in Italy, Spain, France and the US.
In the UK, it owns the insurance brands Admiral, Diamond and Bell and the Confused.com price comparison website, and international brands include Compare.com in America and Rastreator in Spain. A member of London’s blue-chip index with a market value of £6 billion, the group has 6.5 million customers, served by more than 10,000 staff, 8,000 in the UK.
The British market, which remains by some margin Admiral’s largest business, is notoriously competitive. Rivals just among listed companies include Direct Line, RSA, Hastings and Sabre, ensuring that the fight for each new driver is fierce.
Nevertheless, a number of complex dynamics influence and can drive up prices, which tend to move cyclically in reaction to factors such as the rate and size of claims, the costs of repairs, and — a headache for all insurers — the amount of fraud they have to contend with. Having risen substantially in 2017, the most recent evidence suggests that premiums have been falling. According to the latest survey by Moneysupermarket, the price comparison website, the average price for comprehensive motor cover fell by 7 per cent to £468 in the first three months of the year against the same period in 2018.
In its annual results in March, Admiral said it introduced small price increases in the second half of last year and that premiums this year would rise in line with claims inflation. That suggests continued pressure on profitability.
At the same time, insurers operate under considerable regulatory scrutiny, most recently over the profits they make from selling add-on products, how much they charge customers when they renew policies and how they calculate payments for payouts on personal injury claims.
On the last of these, and a measure known as the Ogden rate, insurers scored a big victory last year when they forced the government to back down over a planned change that would have sharply increased compensation payouts and heavily depressed their profits.
The precise revised level for the Ogden rate has yet to be set but reworking its expectations effectively increased Admiral’s pre-tax profits last year by £66 million.
With all this noise in the UK, it’s no surprise that Admiral has been pushing harder into its overseas markets. While the group notched up its first profit at its insurance businesses in Europe last year, life in America has proved trickier.
The US is clearly a huge opportunity, but the price comparison idea is in its infancy there and Admiral has had to spend heavily on marketing, taking a £32.9 million impairment charge last year to cover its investment.
As an insurer, Admiral is clearly a class act and its shares carry a premium rating. Up 68p, or 3.3 per cent to £21.20 yesterday, they trade for 18 times Numis’s forecast earnings and have a prospective yield of 5.4 per cent. The multiple pressure on profits doesn’t make them appealing.
ADVICE Avoid
WHY The opportunities are ample but profits are under pressure from rising costs and claims inflation
Workspace
All worker bees need somewhere to feel the buzz — and Workspace is one of those companies whose business line means that employers can be more flexible about how big that place is and how long staff stay there.
Formerly known as London Industrial, the Workspace Group was established in 1987 as the vehicle for the sale of the former Greater London Council’s portfolio of industrial properties.
It began with 710,000 sq ft of floorspace over 18 sites, mainly in east London. It now owns 65 properties covering about 3.8 million sq ft and valued at £2.4 billion in London locations from Farringdon and Clerkenwell to Vauxhall and Ladbroke Grove. Workspace, listed on the stock market in 1993, has used follow-on share placings and rights issues to acquire more property. It is a constituent of the FTSE 250 with a market value of more than £1.7 billion.
Customers can control the amount of space they take on and leases typically run for two to three years, as opposed to the more conventional timeframe of at least ten years (though normally with a five-year break clause built in).
Its offering initially drew in millennial start-ups that favoured flexible corporate lifestyles, but Workspace’s customers now include established businesses such as the retailers Hugo Boss and White Stuff and Puregym, the fitness group.
The company has been performing well, lifting its rental income and its trading profit and maintaining a healthy occupancy rate of 91.8 per cent. Being the freehold owner of its properties gives it much more choice over how it develops them, and the sites that it has refurbished can command premium rates.
There are some ominous forces at work in the background. Workspace is exposed to what Brexit might do to business investment in a subsequent economic decline, though trading has so far more than held up; it is vulnerable to a drop in commercial property values; and its London-centricity might worry some.
Its shares, up 3p, or 0.3 per cent, to 960p yesterday, trade at a discount of about 10.7 per cent to the net value of its assets. Its forecast yield, according to Liberum, is 3.7 per cent.
ADVICE Buy on weakness
WHY Growing, highly profitable business with attractive model
