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Can the car insurer’s enterprising finance director come up with the goods in a tough market?

by Carlo Svaluto Moreolo

Once he explains it, Kevin Chidwick’s logic seems pretty solid, but I did initially wonder what he was on about. The finance director of motor insurance firm Admiral was outlining the start-up operation in Spain, and words to the effect of – shareholders won’t notice if things don’t go well, but they will if it starts off brilliantly – had me scratching my head.

We are on to overseas expansion. The Spanish operation made a loss in 2007, the first full year, with Admiral not quite getting its pricing right, yet the company isn’t about to rethink its strategy to grow overseas. Chidwick’s point is that making a profit immediately when starting up a new insurance business is virtually impossible.

The £0.7 million loss in Spain in 2007 is a decent result, if balanced with the 47,000 policies sold there, from a standing start. ‘We are testing the market, spending a little bit of money, and if that works, we’ll spend a bit more money, so we’re gradually building it up. If it doesn’t go well, we’ll stop spending the money on marketing and take a hit, but it won’t be that significant,’ he explains. ‘If it goes well, numbers will start to look more material and you will see it from the P&L.’ He adds that a lot of the downside in Spain is covered by an agreement with Munich Re, which takes a large part of the underwriting risk.

Back to the future

Chidwick, 44, became finance director at the successful Cardiff-based car insurer in 2006 after a single year as deputy finance director. Back then, premiums were strained. Discussions were taking place about Admiral’s future. Should it consider other insurance-related products or concentrate on the vehicle market, and expansion of its strong brand and business model overseas? The latter was chosen and the Spanish operation was up and running before the end of 2007, with an investment of less than £1 million.

Chidwick focuses on the shift to the internet: well under way in the UK, with two-thirds of people buying car insurance online. But there are risks in going to other countries as not every country is as computer literate as the UK.

Fast growth

Having checked into a swanky hotel on London’s Embankment, Chidwick seems surprised by my interrogation, an ordeal he’s facing at the end of another long day. But the man with his hands on the purse strings of one of the UK’s fastest-growing insurance companies, quickly finds his feet.

Revenue has grown from £18 million in 1993 when the company was set up, to £825 million last year. Profits have raced from £74 million in 2003 to last year’s £182 million. Matching this, the share price has soared from a 275p float price to over 800p today – and that’s some way off the near-£12 peak of roughly a year ago.

But dangers lurk. Car insurance is increasingly competitive, especially with so many price comparison websites able to expose product pricing in a largely commoditised market, where customers tend toward the cheapest option. In such an environment, remaining competitive and building market share can hit margins.

Shareholders were wary on 4 March, after 2007 results were published. The company may be seeing premium growth for the first time in years, but the pace is slow. Even chief executive Henry Engelhardt called it ‘sloth-like,’ and there was further evidence that Confused.com, Admiral’s admired price comparison online business, is feeling the strain of competition.

The subsequent sell-off sent the shares 15% down, to levels not seen since July last year. Chidwick can’t comment on whether the shares deserved a derating, but when I put it to him that Admiral’s spectacular growth so far may be over, he fights back: ‘I don’t know on what basis you could come up with that statement.’

Admiral’s business model, and success story sound straightforward when described by Chidwick: a large portion of the underwriting risk of the policies is kept off-balance sheet, with agreements with re-insurers such as Swiss Re or Munich Re. To these Admiral pays a profit commission, whereas the company can enjoy all the profits coming from the sale of ancillary products along with policies, and revenue from Confused.com.

Even more pressure

Profits at Confused.com have grown constantly. The simple innovation of comparing car insurance prices has had such an impact that the sector’s dynamics have changed. Each company’s policy prices are mercilessly exposed, increasing price competition, squeezing already thin margins.

Notably, Admiral enjoyed strong premium and profit growth even if its average premium rate at £500, is higher than the market at £400. How so? Chidwick himself admits car insurance ‘is a product almost entirely bought on price.’ He says the higher average premium rate reflects Admiral’s portfolio, which includes more younger and urban customers, who are riskier.

‘It’s not about being the cheapest all the time. It’s about price selectivity,’ he adds. ‘We’re cheapest when we want to be cheapest, not just cheapest.’ He explains that, because Admiral asks more details of customers than average before quoting a price, it can quote a price more accurately.

Beating the market

This has allowed Admiral to constantly beat the market’s average combined ratio, a measure of the profitability of insurers’ underwriting operations. Over the past 25 years, says Chidwick, the sector as a whole has been profitable twice (profitability is indicated by a combined ratio higher than 100%). Admiral instead has made an underwriting profit for most of its history.

Selling ‘ancillary’ products with policies is part of Admiral’s strength, as customers get more services for not much more money. But what if low prices once again become the strongest attraction? Chidwick admits it’s a possibility, but says customers who want to avoid such expenses might prefer additional cover from more expensive policies.

Another issue is profit growth at Confused.com. The website has attracted a crowd of new rivals, increasing competition and slowing the market’s premium growth rate, and also threatening the website’s high market share. Admiral had to admit last year that profits for the business were likely to shrink, and reiterated the view at the full-year results in March. The City focuses on short-term gains and it doesn’t bode well when you say profits in the short term will decrease, so what should shareholders expect?

Admiral should be a winner in the long term, says Chidwick, as the many unprofitable start-ups will eventually consolidate back down. This is why marketing spend will increase this year, as Confused.com fights an open battle with its new competitors. Chidwick admits: ‘We can’t predict how long it will take.’

Selling a stake in the business is still an option, Chidwick says, after the company ended discussions with a potential suitor for a stake in Confused.com last year. The disagreement was not on price, recalls Chidwick, but on the level of control the suitor wanted on the website’s operations. Admiral is not actively looking at partners for Confused.com but selling a share of the operation is not a no-go area.

To many, price comparison websites have made the market tougher across the board, but Chidwick believes it has increased difficulties only for companies that are ‘not very good at pricing’.

‘In the old days, when you did some marketing, you could be wrong in both directions, and on average the two might balance each other out,’ he says, ‘but in the price comparison world, you won’t get away with it. People who are good at pricing will be successful leaders in the future,’ he says.

It is natural for the market to question how a company such as Admiral, which has grown so fast, will continue to surprise. Investing is about patience but eventually bagging returns at the right time. Chidwick instead is fairly convincing when he argues Admiral should continue to register good growth, as the company retains its competitive advantages and enthusiasm. But, with average premiums growing slowly and competition putting severe pressure on both Admiral and Confused.com, the pace of growth itself will slow.

Chidwick’s job won’t become easier going forward, and on this note I ask him about his experience. This is his first seat in the boardroom of a publicly owned company, a FTSE 250 one at that. ‘I think you should speak to the chairman and ask him,’ he bats back in good humour, before following up with, ‘I’m getting concerned myself.’ Good natured banter, maybe, but many a true word has been spoken in jest.

30 SECOND ADMIRAL

• Cardiff-based Admiral was set up 1993

• Floated in 2004 at 275p, the shares hit £11.90 last year

• Sales have soared from £18 million in 1993 to £825 million last year

• Employs 2,000 people; has roughly one million customers across nine brands

• More than 13 million insurance quotes through Confused.com in 2007

• First claim paid out in Germany was to a customer who had crashed his car into a wild boar