Insurance Post

Welsh share hit

Henry Engelhardt-Admiral

Having listed in 2004 at 275p a share, Admiral Group has since gone from strength to strength and is now worth more than four times that. Group chief executive Henry Engelhardt talks to Jonathan Swift about international expansion, aggregators and why its investors can 'sleep easy' at night

Aggregators are everywhere at the moment. Following the entry of Go Compare, Only Insurance and Compare the Market to the sector, Tesco Personal Finance has recently been linked with the possible launch of another site in conjunction with the insurance company that has so far been most resistant to aggregators' charms - Royal Bank of Scotland Insurance.

Confused by this sudden influx? Admiral Group chief executive Henry Engelhardt - the man who claims to have pioneered the idea four years ago - is not at all surprised by the competition.

"Whenever you generate the profits and growth that we have done with Confused.com, you are going to spawn imitators. There was always going to be more competition in this sector, just like in direct writing.

"When Admiral entered direct writing in 1993, Direct Line was the clear leader. We were the seventh direct writer in the game, and a year later there were 12. Two years after that there were 20, but now there are only a handful. It looked like everybody was going to have jam tomorrow with direct writing, but many crashed and burned."

Mr Engelhardt admits that most insurers were initially as resistant as RBSI to the idea of joining Confused's panel, but adds that many soon came round to the idea because they simply could not lose. "Confused makes money when someone makes a sale, so the only way to convince people to come on to the panel was to say, 'If you don't win, it doesn't cost you anything, you only pay us when you win'."

But despite the success of aggregators, RBS and its collection of insurance brands has remained unmoved - even though it has been reported group chief executive Fred Goodwin has expressed interest in how well these providers are doing, while his own brands' growth has remained predominantly flat.

Money Supermarket's insurance managing director, Richard Mason, recently claimed this stance made RBSI outdated (Post, Personal Lines Supplement, 29 March, pp4-5), but Mr Engelhardt is more understanding as to why the insurance giant has so far resisted any moves.

"It makes sense if it is about the sanctity of the brand. Having invested so much time and money in the Direct Line brand, RBSI doesn't want this to be usurped by Confused.com, so that people only think 'Car insurance? Go to Confused.com'. By keeping Direct Line separate, it is able to say, 'If you want a Direct Line quote, you have to contact Direct Line'. And a lot of people will; it is still a very powerful brand."

Success story

One thing Mr Goodwin is sure to have noted is Confused's recent results, reported as part of Admiral Group, which revealed a sharp increase in profit from £8.8m in 2005 to £23.1m in 2006. The aggregator generated more than nine million quotes last year alone, up 118% on the previous 12 months.

"It's like a freight train," Mr Engelhardt continues. "On top of good results for last year, we set a record for quotes and profits in January. I have not seen the figures yet for February and March, but it keeps growing."

Admiral's success story has been one of the insurance market's most notable in recent times. But it has also been held up as a success story for the Welsh business community and, more specifically, the country's inward investment teams.

Mr Engelhardt recalls: "There were five of us in the business-plan team in London, and we could have put the business anywhere outside the M25 as we were a telephone-based insurer. We sent off letters to 10 grant areas, and two days later South Glamorgan County Council, as it was then, gave us a call asking if they could come up and make a presentation. They showed us these wonderful slides of Cardiff, where it was nice and sunny with loads of flowers, and boy were we sucked in."

Despite putting on a good show and pricking their interest, Mr Engelhardt and his team still needed convincing - but the Welsh agencies' enthusiasm and efforts were not matched by the others it had written to.

"We didn't hear from the other nine places that we wrote to," he explains. "We contacted some of them, but they just said, 'If you locate here, we will have a look at what we can do for you'. Yet we had a variety of Welsh agencies falling over themselves to get us to invest there. In the end we chose Brighton as our non-grant site.

"The people there were very nice, but they had no grant money, and in the end the Welsh Development Agency (now branded International Business Wales) stumped up a million-pound grant, so we did it here in Cardiff.

"I reckon we have put about £300m back into the local economy in our 15 or so years, so it turned out to be good investment from the WDA. And that's growing at about £50m a year."

Welsh gain

Ultimately, Brighton's loss was South Wales' gain, and to make it even more galling for the Sussex seaside city, Mr Engelhardt admits: "In the end, we did not even need the million. We got off to a flyer, as 1990 was God's gift to motor insurers. We didn't need the grant, but we took it and here are we are. If we had not received the grant, we would have gone to Brighton. We had property picked out there and were waiting when the WDA came back and said, 'Fine - here is a grant'.

"Cardiff had the right characteristics, such as size, as we were looking to recruit quite a lot of people. It is also only two hours out of London, and every time we objected to something, one of the guys from the agencies would come back and say 'well, we'll fix it if it is not right. We will put on a bus route, we will do whatever'. They could not have done any more to accommodate us, they were fantastic in terms of getting us located."

Although not his first choice, Mr Engelhardt has warmed to Wales over time. But his initial impression of the country was less favourable. "When I was setting up the marketing at Churchill in 1988-89, we did a focus group for the company in Swansea. As an American I had not travelled around the UK much and, when I got there, I thought this must be the end of the earth. It was a cold, wet, windy evening - it really looked grim.

"That was my first exposure to Wales. Of course, before we set up here we visited quite a few times and got to see a much truer representation of the people and places."

Indeed, once Admiral had outgrown its Cardiff office, Swansea - once viewed by Mr Engelhardt as the end of the earth - became the insurer's ultimate choice for its second office, one that has been a monumental success in his eyes.

"We decided to either find the lowest-cost location or stay within 60 minutes of Cardiff, so the trainers, managers and staff can go back and forth easily, and have contact with the second office. We thought that was the best strategy: to draw a 60-minute circle around Cardiff, you are limited, and there was not a lot out in Swansea at the time. Newport was a bit more crowded.

"But Swansea has done fantastically and grown a lot in the 10 years we have been located there. When we started, we thought we may be able to grow that office to 300 people at a real push; today we are up to a 1000."

As for the differences between the staff, he adds: "Going into the Swansea office is always fantastic, it is very relaxed and friendly. Cardiff is a little more serious. They have different personalities."

Growth drivers

The key driver behind Admiral's need for a second site has been its growth, propelled by the multiple brands launched.

Reflecting on how this began - and in what could perhaps be seen as a timely warning for the aggregators crawling over each other for the same business - Mr Engelhardt says: "When we were writing our business plan, we saw that Direct Line had rightly gone after the 'good driver' market; Churchill followed, then there was The Insurance Service, GA 1 to 1 - they were all in on that good-driver market. So we decided to steer away from Direct Line as we didn't have the economics in our early days to compete with it.

"Instead, we decided to go after the higher premium business - the younger drivers, city dwellers, areas where Direct Line was not so strong or targeting - and to do battle with the brokers because of the commission they receive from insurers. We still deal with those same people today."

Branding and memorability is something that Mr Engelhardt prides his company on, as well as plagiarising ideas from other sectors. "When we created multi-brands for the insurance industry, that was a new idea. But Proctor and Gamble, for example, have been doing multi-brand in shampoos for years. So a lot involved lifting ideas from elsewhere and applying them to another industry.

"Diamond and Bell were our first alternative brands, and Diamond's targeting of women remains a very strong concept and brand. We believe in tribalism: if you go into the Diamond team, it is different to the Admiral brand, which is different again to the Elephant team. We let the managers put their own personal stamp on the area."

The most recent addition to the Admiral family has been that of its Spanish brand Balumba, which went live in November 2006, and Mr Engelhardt admits that creating a brand with a memorable icon and easy-to-spell name proved a challenge.

"Balumba wasn't even close to being our first pick, but we could not get the domain names for our preferred choice. So we kept going until we found a name that was free as a domain name and lent itself to a good image ('Balumba' actually means 'centipede' in Mexico, hence the logo)."

Germany is next on Admiral's hit-list, and Mr Engelhardt concedes that this market creates more problems than that of Spain, given that Direct Line's Spanish business has grown much quicker than its German one - which is something that hints at a greater resistance to buying insurance direct.

"Germany is a very different market. Looking at the research we have on consumers in the UK, Spain and Germany, you can see how relatively similar the UK and Spanish ones are," explains Mr Engelhardt.

"Getting involved and really understanding German consumers is going to be key, but the market is huge. Our whole international expansion plan is based on a very simple premise: the internet is an irresistible force. The UK is clearly the market leader in the internet delivery of car insurance worldwide, and we are at the vanguard of that. Ultimately, the internet will be an important distribution channel in all the other major markets, and we want to be along for the ride.

"Looking at our business plan, we have taken out all of the small countries. It is so time-consuming and expensive to set up in the big countries that it would be insane to do it in every small country. The next three on the list are France, the US and Italy - all very different, all very interesting."

New partners

While Mr Engelhardt is enthusiastic about overseas expansion, he is less keen on stretching the Admiral group into other underwriting sectors, preferring to team up with specialists to offer different products. For example, its commercial van offering is provided by Gladiator; household through BDML; and travel through Drakefield.

"We came to a fork in the road and toyed with either stretching the brand or sticking with what we do well, and looking elsewhere for partners - and we chose to look elsewhere. We want to remain a car insurer and stay focused. We have also kept away from the affinity market because we don't like the fact that, in general, the affinity partner owns the consumer and controls the relationship."

Admiral operates what Mr Engelhardt describes as a 'sleep-easy' model, given that Munich Re subsidiary Great Lakes currently takes the majority of its premiums. However, renegotiating the deal in December 2006, Admiral widened the co-insurance deal to include Swiss Re and Partner Re, and will decrease its dependency on Munich Re by 5% every year until 2011, when 40% of Admiral's business will be underwritten by Great Lakes.

"This deal insulates us against the violent swings of the UK motor market; because Munich Re is taking 60% of our premiums, it gets 60% of our claims costs and 60% of our expenses. We get a profit commission back if we make money for them, so we get more than our share of the profits, but we don't take all that risk, which is especially good when the market is in a bad state.

"During the recent results season, where there was no hit from hurricanes, you saw insurers go from £70m to £200m profits. Well, it could be £35m next year and £300m the year after that, and the investment community does not like such violent swings. So we have a 'sleep easy' model; it does not matter how bad things get, we are only in for a fraction. Having said that, during the good times we are sacrificing some of our profits.

"This year, we stepped back a bit having brought in some other partners, so we are underwriting 22.5% of our premiums with our own capital this year, which is down from last year where we were 25%. But, over time, we have the potential to find reinsurance partners who can take more and more and, by 2012, we will control 60% and Munich Re will control 40%."

Happy staff

It appears that it is not only Admiral's investors that are sleeping easy, but its staff too. Admiral has promoted itself as a good company to work for in a number of ways, not least by giving employees significant windfalls when it floated in 2004.

The insurer has also featured in the Sunday Times' 'Best Companies to Work For' list for seven years in a row, recently scoring positions of 20 in 2005, 20 in 2006 and 21 in 2007. This is a result Mr Engelhardt is very proud of because the rankings are voted on by staff.

"The company is 14 years old, and there are a huge number of employees who have been here 10 years," he continues. "With regard to the Sunday Times list, we are the only one out of the top 25 companies that have more than 2000 people. Half of those on the list have less than a 1000, and it is easier to motivate and energise a smaller number of people. Consequently, we are proud of being the largest firm in the top 25."

New ideas

With Admiral competing in a competitive and increasingly congested market, how does the insurer - outside of international expansion - see itself growing, given that the personal lines market is often marked as one lacking innovation?

"There are always new ideas," responds Mr Engelhardt. "I remember doing a case study for my MBA, and there was a yoghurt company that saw business shoot up simply by changing the size of its cups, because it meant people could take them for lunch. There are always new ideas, you just have to find them." However, he adds: "We should spend more time looking at new ideas because these are the ones that consumers latch onto."

One recent innovation he is yet to be sold on is pay-as-you drive insurance. Admiral trialled a scheme similar to those being run by Norwich Union and Royal and Sun Alliance, but Mr Engelhardt was not convinced by the potential returns.

"We did a small trial, but I don't see how it stacks up economically as the kit is very expensive. Maybe the price will eventually come down, or it will be included with every new car, and then it becomes more interesting. But at the moment we don't see it. It is also not wholly reliable."

He concludes: "We have never wanted to be a leader in the IT arena. There is a lot of expense in being a leader, and we would much rather someone pave the way for us to drive on behind."

Finally, he addresses the question of potential acquisitions - or, given its increasing success as a stand-alone brand, the possible spin-off of Confused as a separate company.

On the latter point, Mr Engelhardt says: "We are always keeping our eyes open to what the options are and, at the moment, we like Confused where it is."

Regarding acquisitions, he concludes: "Yes, we look and stack up how much it will cost us, but we are not in a hurry. A lot of acquisitions happen because companies want to grow fast, whereas part of our strength lies in being patient. With acquisitions, you have got to dig in and say, 'What will really come out of this deal?' and ask questions such as, 'How are we going to manage this?' In any case, we are not likely to pay what the sellers' market currently hopes to receive.

"We have been close a couple of times with companies outside the UK, but nothing recently."

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