Admiral shares drop as Goldman Sachs cuts insurer’s rating
A downgrade from investment bank Goldman Sachs is sending Admiral shares lower this morning.
Goldman have downgraded the insurer from "buy" to "neutral" on the back of recent outperformance from the stock, which has seen shares fall by nearly 1.8 per cent.
When Goldman reiterated their "buy" rating for Admiral in October, they found that shares had "suffered unduly from negative sentiment" in the third quarter of 2013.
That was on the back of "concerns over softening motor premium rates" and peers cautioning on growth prospects for the second half of the year.
Admiral shares are up 19 per cent since that note's release on 18 October, which Goldman identifies as "outperforming the broader European insurance index" by 16 per cent.
Goldman analysts identify three potential sources of upside risk to their earnings forecasts for Admiral's full year results, due on 5 March.
1. UK motor rates
After a sustained period of UK motor price increases from 2008 to 2011, Goldman assumes there will be a "turn in the pricing cycle by the end of 2014" after the last couples of years "have seen persistent downward pressure on prices".
2. Admiral’s vehicle growth
Stronger and sharper improvements in Admiral’s vehicle growth should come in 2014, with growth ramping up from an expected two per cent in 2013 to five per cent this year.
Goldman see growth of eight to nine per cent in years thereafter, and for that to gradually improve "as motor pricing hardens."
"Although Admiral has in the past been able to grow at a significantly quicker rate than this, this was at a time when it was a less mature player growing from a smaller market share position" say Goldman analysts.
3. Reserve releases & profit commissions
Goldman have reiterated a view that "Admiral has a strong track record of conservative reserving" and "in the absence of a major spike in claims cost" the investment bank sees larger than anticipated reserve releases and profit commission earnings in the next few years.
"Overall, we believe that Admiral has a large combined stock of reserve releases and profit commissions to release over the next five years".
