HomeServe looks abroad as FSA case looms

Growth in international business offsets UK group’s domestic woes

HomeServe, the repair and insurance group, will soon have more international than British customers as it shrinks its UK business amid an investigation by the Financial Services Authority into alleged mis-selling.

The company, which insures nearly 3m people in the UK against burst pipes, broken-down boilers and problems with electrical appliances, said the probe by the regulator into how it marketed and sold some of its policies could take several more months.

Customers who may have been mis-sold policies will be contacted next year and the company could still face a large fine or be forced to pay compensation. Although it has set aside £24m for the cost of contacting and reimbursing customers, it has not yet made provisions for a fine or the cost of the investigation itself.

With its domestic business under pressure HomeServe has been growing in the US and Spain. Announcing an 8 per cent rise in half-year revenues and a 5 per cent increase in pre-tax profits to £19.1m, HomeServe said it was on track for international customers to eclipse the number in the UK by the end of the financial year. Customer numbers in the US grew by 20 per cent and in Spain by 42 per cent.

Richard Harpin, the chief executive who founded the business in 1993 as a joint venture with South Staffordshire Water, said: “The big question is whether the issues in the UK would spill over into the rest of the world. It’s very clear they haven’t.”

The company, which sells its products through affinity partners such as water companies, has struck two new deals in Italy and six in the US over the past six months, including Montana Dakota Utilities, where it bought the home services programme – its eighth acquisition in America.

In the UK, which accounts for 59 per cent of revenues, the group has contracts with the 15 big water companies, two of which have been renewed in the past six months.

Customer numbers in the UK have fallen from 3m a year ago to 2.5m but the company is partnering with water companies to launch face-to-face sales in shopping centres. Customer retention rates have also improved to 80 per cent and are expected to pick up further in the second half.

With the FSA investigation expected to take some months, David Brockton at Espirito Santo said: “HomeServe’s first-half results are positive in the context of recent uncertainty but the group is still subject to an FSA review and the effectiveness of its UK marketing remains untested and this will continue to limit performance.”

The group has been overhauling its sales procedures, introducing penalties for sales staff that receive follow-up complaints, and improving the clarity of marketing material.

Separately, the company was also fined £750,000 by the telecoms regulator Ofcom earlier this year for breaching its rules on silent and abandoned calls. It is also compensating customers who received poor service and were left without heating in the bitter winter of 2010.

The company’s best-selling product in the UK provides cover for plumbing and drainage emergencies at £100 a year; while a combined policy that includes electrical and boiler breakdown costs £300.

Company comment

HomeServe’s pipes still need fixing despite the upbeat tone struck by the repair and insurance group on Tuesday. Although the company has been boosted by its French operation, where the company has taken full ownership of Doméo, there’s not quite enough mastic to fill the gaping hole left by its British business, which could expand further depending on the FSA’s actions. With the FSA ruling looming over it, there seems little reason to take a risk on the shares, which are trading on a pe of 9.8 times 2013 earnings.

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