'Shocker' OFT report could hamper Direct Line & Hastings IPOs

The Office of Fair Trading’s likely referral of its private motor insurance probe to the Competition Commission is a “real shocker” and has wide implications for the insurance industry, a leading analyst said today.

Shore Capital analyst Eammon Flanagan warned that the Hastings and Direct Line flotations could suffer as a result.

And he said the OFT’s report could cause problems for Admiral which relies on ancillary sales.

“Real shocker”

In one of the first reactions to the news, Flanagan said: “In a real shocker this morning the OFT has provisionally decided to refer the UK private motor insurance market to the Competition Commission.

“In a brief but pretty damming statement, the OFT describes the UK private motor insurance industry as ‘dysfunctional’, with the players more interested in gaining competitive edges rather than providing better service to drivers, thus resulting in significant increases in premium rates.

“The OFT sets out clearly the apparent lack of control that ‘at-fault’ insurers have over repairs, replacement services and costs, with ‘not-at-fault’ insurers and other participants taking the opportunity to increase revenue from various rebates and referral fees…issues that we have highlighted consistently in recent years.

“Particular examples referred to by the OFT are credit hire referral fees (from credit hire companies) and other referral fees (eg from paint suppliers!). A final decision by the OFT is expected by October 2012.

“We suspect that this announcement will be greeted with a loud cheer by the UK public, with a clear focus by the OFT on highlighting those issues which have forced premium rates up.”

Insurance industry backlash

Flanagan added: “Not so by the UK private motor insurance industry! In particular we highlight Admiral (sell) where over 60% of 2011’s profits emanated from ancillary income, of which a sizeable (unquantified by the group) arose from a variety of such referral fees.

“The uncertainty this announcement brings to the suitability and sustainability of Admiral’s business model is likely to hang over the stock for months to come.  We reiterate our sell recommendation on the stock.

“The 17% drop in UK motor premiums reported by RSA (buy) in Q1 2012 now seems prescient…we do not envisage any big impact on it, whilst for Aviva, there are bigger issues to worry about.

“Of course, all this uncertainty over the UK motor insurance industry could stymie attempts by respective owners to ‘IPO’ insurers such as Direct Line and Hastings.”