Admiral Group – New Holding

Admiral Group – LON:ADM
Share Price – 1987p
Market cap – £5.65bn

The inclusion of Admiral Group in my portfolio has marked something of a watershed moment for me, and it’s something that I hope I don’t regret. I say this, because in terms of valuation, Admiral Group is easily the most expensive stock I have bought on a price/earnings, or a price/book value basis that I have owned. However, I do feel that the premium attached to Admiral is justified by an experienced management team that have run the business in an exemplary fashion while still only scratching the surface of future international growth.

Quality Underwriting

Admiral Group are P&C insurer based in the UK that operates both in the domestic market, and internationally. They primarily derive their profits from their well established and mature UK motor insurance business. This part of the business has delivered outstanding returns, due to the industry leading underwriting standards that they have set, combined with an exceptionally low expense rate and extremely conservative releasing standards when compared to any other competitors. For those not familiar with the insurance industry, when evaluating the quality of underwriting, I find the two best metrics to determine this are the combined ratio and reserve releasing/strengthening.

The most recent investor presentation only presents a trailing 10 year history of expense, combined ratio’s, and reserving, but if you were to go back to 2000, you will find will find the the overall trend towards out-performance remains strong in these areas.

Growth

I’ve demonstrated the quality of the underwriting, but what about growth prospects? Well, the potential runway here has the potential to go on for quite some time yet. For a start, Admiral only have a 13% market share in their core UK market. Clearly there is still an opportunity for growth in the core, extremely profitable market. It gets better though. In recent years, Admiral have taken their unique and wildly successful insurance model and have exported it abroad to other jurisdictions in the US, Spain, France, and Italy. Building up these markets from scratch has not been easy, indeed Admiral have sustained early losses. However as they have built up scale in markets abroad, losses have started to recede, and in some instances break even numbers have been reported. Positive numbers from the international operations will not come over night (or even in the next year). However, I think this provides opportunity to the long-term investor, and with such a proven model and management team in place, I think it would be a mistake to write-off the success of this venture.

Outstanding Track Record

Returning to the overall numbers, please don’t take it from me though, you only need to look at the previous 10 years of financial results to see just how outstanding the business has performed.

With such an outstanding track record, I feel that despite a high valuation, the opportunity with Admiral I still compelling for a long-term, buy and hold investors and have initiated a position.

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