Motor specialist attributes 34% rise in net ancillary income to increase in policyholders

Admiral chief operating officer David Stevens has defended his firm’s reliance on ancillary income amid analyst criticism about a high percentage in the group’s UK motor profit.

The comments came as the motor insurer turned in another market-beating performance. Group profit after tax rose 23% to £193.6m in 2010 from £156.9m in 2009, and the combined ratio improved to 89.3% from 92.1% as many car insurers posted combined ratios of over 100%.

Net ancillary income increased 34% to £142.4m in 2010, making up 52% of the UK motor insurance division’s profit before tax of £275.8m. Underwriting profit, by comparison, accounted for 19% of the profit. Ancillary income per vehicle increased to £77.50 from £72.

Shore Capital analyst Eamonn Flanagan described the reliance on ancillary profits as a worrying trend. “The sustainability of these earnings remains in doubt, due to both the potential changes from the Jackson Review and because the age of austerity is likely to test the discretionary element of such income.”

But Stevens said ancillary income, both as a percentage of profits and amount per vehicle, was in line with levels held for several years. “The reason it has grown so much is that we have a lot more policyholders, rather than that we are making a lot more money per policyholder.”

The number of vehicles insured by Admiral in the UK rose 32% in 2010. Total premiums written increased by 35% to £1.2bn from £804.7m.

Stevens credited part of Admiral’s ability to grow quickly and remain profitable to its success in underwriting business from price comparison sites. Admiral estimates comparison sites accounted for 52% of the UK motor market in 2010, up 16% from 2009. “Price comparison is really survival of the fittest,” he said.

“If your pricing or claims management is at all poor, being top of a price comparison site is a recipe for disaster. But if you get your pricing and claims management right, it is a recipe for profitable growth.”

While Admiral has again performed better than its UK motor rivals, Stevens said the company could not rest on its laurels. “Some of our competitors have been energised by poor results to change their business and do things better. If they do that, it is a challenge to Admiral.”

One area of focus will be the challenges posed by the European Court of Justice’s ban on gender-based underwriting. Stevens said it would call for analysis of the rating to recapture the loss selectivity previously available using gender.

Admiral's profits 2007-10