The profitability of UK auto and home insurers Admiral and Direct Line could face challenges following potential regulatory actions by the Financial Conduct Authority (FCA), according to Bloomberg Intelligence (BI).
The FCA is scrutinising the practice of premium finance, where insurers charge interest to customers opting to pay their auto or home insurance premiums monthly instead of in a single payment.
In the first half of the year, Direct Line generated £45 million in revenue from premium-finance income, while this form of income constituted 13.6% of Admiral's profit before tax in 2021, as noted by BI. The increased regulation by the FCA, coupled with a highly competitive market and rising claims costs, is presenting a challenging environment for these insurers.
On January 9, the share prices of Admiral and Direct Line experienced a dip following comments from FCA insurance head Matt Brewis. In an interview, Brewis labelled premium finance as “a poor product” and hinted at the possibility of regulatory action, given the FCA's ongoing discussions about this practice.
Kevin Ryan, senior industry analyst for insurance at Bloomberg Intelligence, remarked on the increasing regulatory pressure, noting that Admiral's ability to sell add-on benefits, including premium finance, has been diminishing.
“That includes premium finance, and at H1 the total of all non-insurance products was 18% of operating profit (22% at FY 2022). In 2021, instalment income from premium finance contributed 13.6% of profit before tax, and total ancillary income (excluding profit commission) was 33.6%. Still, the Bloomberg MODL consensus for FY 2023 places Admiral at a price/earnings ratio of 21.8, a five-year high,” Ryan said.
Ryan also pointed out the contrasting financial performances between Admiral and Direct Line, with the latter reporting a £180 million operating profit loss in auto insurance for H1, following a £132 million deficit in H2 of 2022.
“Given the sharp divergence in results with larger peer Admiral, there may be issues with Direct's IT system introduced in June 2021, making the insurer's profitability potentially vulnerable to any suggestion the FCA might engage with it in regard to the enforcement of Consumer Duty – or any aspect of the UK's General Insurance Pricing and Practices – rules,” he said.
Direct Line's H1 revenue from instalment income, representing 2.8% of its insurance revenue, is a point of concern. However, Ryan suggested that the potential loss of this revenue might be less significant to earnings than improving the auto underwriting result.
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