Admiral Group (LSE: ADM) shares rose about 45% in the past year. The returns are exceptional as it outperformed the broader market index. The FTSE 100 index rose around 25% in the same period.
The Covid-19 pandemic has changed the entire landscape of investing. Some of the index’s sectors might take many years to recover. However, I believe that the insurance sub-sector is less prone to such risks. More specifically, motor insurance has to be renewed every year. Here, I would like to focus on this FTSE 100 company.
Admiral Group’s revenue growth has been good. It grew at a compounded annual growth rate of 8.3% from 2016 to 2020. In 2020, revenue grew by 2% year-over-year to £3.55bn. The growth rate is less when compared to the historical period. However, taking into consideration the drop in new vehicle sales last year, it’s still good.
I look for companies with good profit growth. Admiral’s profits before tax grew by 21% y-o-y to £638m. Another important metric, return on equity, was equally good at 52%. The company’s solvency ratio is strong at 187%, even though it is slightly lower than the previous year’s figure of 190%.
The company has been innovative and investing in new technologies. This can be seen in the increase in the number of customers. In 2020 it grew by 10% y-o-y to 7.66m. This shows that the company has a significant share in the UK market.
Finally, a dividend yield of around 5.0% is the icing on the cake. The company paid a dividend of 156.5p for 2020. This is another reason why I like this FTSE 100 stock.
Risks to consider in this FTSE 100 stock
The insurance sector is very competitive. With the rising use of technology, customers can easily compare quotes. Admiral also has to face competition from new technology-driven insurance companies. For example, former Aviva chief Mark Wilson has started a new tech-led insurance company, Abacai. There could be a lot of similar companies eating into the company’s market share.
Insurance companies are also under criticism that consumers are overpaying premiums. The Financial Conduct Authority (FCA) has proposed new legislation that would prevent insurance firms from charging existing customers more than new customers. This could impact the company’s margins in the future.
Last year, new car sales dropped due to Covid-19. If new car sales do not recover this year then it could negatively impact the company’s shares. This could be a long-term blow to the company’s earnings as it impacts renewals over a period of time.
Looking into the future the management has warned that they expect a rise in claims this year as lockdown eases. The loss ratio, i.e. the amount it spends on claims compared to how much it earns on premium, will be higher than the previous year.
The company’s financials are good. The motor insurance business has not been negatively affected much by the Covid-19 pandemic. However, I am bit worried about the expected drop in profits this year. I will keep this FTSE 100 stock on the watchlist and not buy just yet.
Royston Roche has no position in any of the shares mentioned. The Motley Fool UK has recommended Admiral Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.