FTSE 100 insurer Admiral (LSE: ADM) saw its shares jump 11% last week in yet more excellent news for the sector. The rise in share price was caused by a profit jump and a hike to the dividend. It means no other Footsie stock has risen more over the last month and has me wondering whether it’s time to add it to my own portfolio.
The profit surge is an intriguing one. It came on the back of a decision to go against the insurance business grain. Essentially, Admiral raised premiums with inflation as it was hitting those 10% levels from a couple of years ago.
Other insurers chose to absorb some of the costs in order to retain more customers. Well, the result is that Admiral’s decision-making has paid off with a 32% jump in profits in the first half.
Thorny issue
It’s a fine balance. Price too low and you don’t make any money and make a lot of shareholders unhappy. Price too high and your customers go to other firms and you perhaps draw accusations of corporate irresponsibility and greed.
It looks like a balance Admiral has handled shrewdly here as it was able to bring prices down this year. Customers numbers have grown to record levels with 5.5m across the UK now in its main car insurance division. Inflation is a thorny issue for almost any company so the way management handled it was (ahem) admirable.
So what about that dividend then? The dividend hike was formed mostly with a 19p special dividend added on to the upcoming interim dividend. The 2024 yield is expected to come in at 6.9% on today’s share price. That will be one of the highest payouts on the Footsie and is in line with Admiral’s strong dividend history including yields of 7% and 8% in the last five years.
A one to consider?
Another reason to think about buying into Admiral or insurance more broadly is interest rates. Higher rates have been a boon to insurers like Admiral that can take advantage of higher borrowing. Insurers tend to have large assets on their balance sheets. Higher rates means a higher yield on some of these assets.
The UK 10-year gilt, probably the best measure of expected rates for the next decade, is currently 3.9%, which suggests many more years of being able to take advantage.
That said, it must be pointed out that this upswing is not happening across all insurance at the moment. The FTSE 100’s largest insurer Prudential‘s shares are down 33%, second largest Legal & General up 3% and third largest Aviva up 30%.
Of the smaller insurers, Phoenix Group is up 7% and Beazley is up 39%. A fairly large and mixed bag and a lesson in the importance of prudence (no pun intended) in stock picking.
As for my own decision, I’m exposed enough to the sector that I’d need a really compelling reason to buy in here to rush to buy the shares this second and I don’t see that. But Admiral has had an impressive time of things and it will be one to add to my watchlist.
