Will Admiral sink or swim?

ADMIRAL's flotation is set to become the biggest on the London Stock Exchange so far this year. Some in the City are even hailing the market debut of the Cardiff-based specialist motor insurer as marking a revival in initial public offerings.

The price range indicates that the valuation of company will be £634m-£776m. But the company maintains that the motivation behind the IPO is not to raise money. Admiral says it already generates plenty of cash.

The company wants to allow existing shareholders, such as Barclays Private Equity and Bermuda-based insurer XL, to sell portions of their stake and capitalise on their investment. Employees are also set to gain, with the average windfall for staff at £37,000, depending on length of service and seniority.

Institutional investors are being offered 32% of the total equity in Admiral. Barclays Private Equity, which is selling just under half of its 33% stake, will make the biggest gain. Munich Re, the second-largest holder, is not selling any of its 14.5% stake. (See the figures below.)

Chief executive Henry Engelhardt and chief operating officer David Stevens have pledged to sell no more than a fifth of their holdings at this stage.

So what's the outlook for Admiral? At present it has about 4% of the UK motor insurance market. The latest results have shown their business model to be robust with its 800,000-strong customer base continuing to grow.

Established in 1993, the firm targets motorists in high-premium categories while taking an ultra-prudent approach to underwriting. It also owns online broker Elephant, women-only insurer Diamond and Bell Direct, which targets safer drivers.

Turnover for the first half of 2004 was up more than 30%, as were profits, which hit £45.3m. The company also said that in the first half of this year its claims-to-premiums ratio was one of the best in the industry at 64% compared to an average 77%.

In a recent survey by research firm Datamonitor, a majority of insurers said they would 'not reduce premiums in the face of any price war'. Analyst James Greenwell, who wrote the report, is sceptical. 'The industry is locked in a cycle it can't seem to break out of,' he said. 'Premiums are on the cusp of a downturn.'

Justin Urquart Stewart, director at Seven Investment Management, is also lukewarm. He says there is little about the company that is unique and that could not be copied. 'Admiral has seen fantastic growth but the whole sector is financial baked beans - anyone can make them,' he said. 'The best of the story has already been told with Admiral.'

However, the good news is that the stock should yield a good income. Admiral has said the dividend will not be less than 40% of cash earnings. Analysts calculate the shares should therefore yield between 3.7% and 4.5%.

So are the optimists justified in heralding this as a recovery in the market's appetite for IPOs, as they did at the flotation of online phone directory Yell last year?

Admiral is only the seventh company to come to the main market so far this year. And the £2bn raised so far this year is only a fraction of the £10bn-plus achieved in 2000.

This year's newcomers, such as Premier Foods, Halfords, Catlin Group, Virgin Mobile and CSR have shown only modest gains in their first few months of trading. Insurer Catlin, a Lloyd's of London, debuted in March with a price at the bottom of the 350p-420p range announced, and is now trading at around 380p.

Hilary Cook, director of investment strategy at Barclays Stockbrokers, feels that although momentum is more positive than in recent years, there is still a huge amount of scepticism among investors.

'Companies used to go public in order to raise capital to improve future dividends,' she said. 'Private equity is much easier to get hold of these days though and flotation seems like more of a last resort when the partners want to sell.'

Spread betting firms say Admiral will have to slash its float price to make sure this IPO is plain-sailing. 'There seems little appetite for this IPO at the suggested price of 245-300p,' said a spokesman for Cantor Index. 'Admiral and its advisers must leave avarice in the in-tray and issue the stock no higher than 260p.'

Cantor is quoting a grey market spread of 235p-245p. Full trading begins on 23 September.

Admiral owners before and after float

CEO and COO: 29% - 23%
Equity Partners: 53% - 33%
Other employees: 17% - 11%
Institutions: 0% - 32%