The Admiral (LSE:ADM) share price saw a small but noticeable spike last week. As a result, the stock’s 12-month performance now stands at just over 40%. That’s not bad for an insurance company, in my opinion. So, what’s behind this growth? And is it too late to add the business to my portfolio?
The rising Admiral share price
As a reminder, Admiral is an insurance provider for several categories, including home, travel, and motor. The latter of these is the most popular choice for its customers. While it’s certainly not the only player in the space, it seems the firm has become the go-to option for more than seven million customers in the UK. That makes it one of the largest insurance companies in the country.
Last week, the management team released a trading update ahead of its half-year earnings report. And it was pretty encouraging. While car journeys are no longer prohibited in the UK, the ongoing lockdown restrictions have continued to keep the roads (relatively) clear. As a result, the number of motor claims so far this year has been significantly lower than historical levels, allowing Admiral to increase its margins. This effect is further boosted by a simultaneous fall in bodily injury claims which tend to be the most expensive for motor insurance companies.
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The overall performance came in better than expected, leading to a guidance increase for underlying profits. Income for the last six months is estimated to be between £450m and £500m. This is obviously fantastic news for shareholders, so I’m not surprised to see the Admiral share price on the rise.
But it’s not the only contributing factor. Dividends are also increasing, with a special dividend coming as well. Thanks to the disposal of its comparison website business Penguin Portals, the company is returning £400m of the £460m proceeds to investors sometime around October.
The risks that lie ahead
No investment is without its risks. And as promising as these latest results are, they may not last. From what I can tell, most of the boosted performance doesn’t originate from a fundamental improvement in operations or a rise in customer numbers. But rather from a favourable operating environment caused by the pandemic. Needless to say, that may soon be over.
As the vaccine rollout continues to progress and the UK starts to return to normality, the number of cars on the road will begin to climb once more. This does mean Admiral might be able to boost its customer numbers. But it’s also a double-edged sword since the number of road incidents, and consequently insurance claims, should rise.
The bottom line
Despite the looming threat, I personally think the reward is worth the risk. The business has been around for decades, during which a global pandemic never entered the picture. And throughout that time, the Admiral share price has been steadily and consistently rising. As has its dividend.
There may be some short-term volatility ahead. But as a long-term investment, I think Admiral will serve my income portfolio well. So, I am tempted to add some shares today, even after the recent increase.
