Shares in Admiral slumped today after it admitted that its Confused.com price comparison website was facing tough competition from new rivals like Tesco.
The company warned investors that Confused – which was one of the first UK sites to allow consumers to compare quotes from a range of insurers – faces a "much tougher year" in 2008 and that the overall UK insurance market was still challenging.
"A year ago there were two price comparison sites advertising on television – Confused and MoneySupermarket.com. Now there are nine," said Admiral's chief operating officer David Stevens.
Stevens estimated that Confused's market share has slipped from over 60% a year ago to around half the market in the second half of 2007. He said the company will keep spending on advertising to defend its position, but conceded that the site's overall share will probably still fall below 50% in 2008.
"It depends on what our rivals do. If they spend a lot, it would be a surprise if that did not happen," he said.
The overall price comparison market is growing rapidly, attracting newer rivals such as GoCompare and Tesco Compare. Confused carried out 13m searches in 2007, up 42% on the previous year, and grew annual pre-tax profits from £23.1m to £36.7m.
Analysts at Citigroup predicted today that the site's profits would fall this year as competition increases.
Overall, Admiral beat City expectations with pre-tax profits of £182.1m, around £11m more than expected and a 24% increase on a year ago.
But shares in the company plunged by nearly 16%, losing 157p to 845p, after chief executive Henry Engelhardt warned that the UK insurance market was only improving slowly, and had not yet turned the corner.
Admiral's premiums rose by 4% last year, below the long-term average of 5% growth. Engelhardt admitted that there was little hope of significant improvement in the car insurance market this year.
"The UK car insurance market cycle is turning with sloth-like speed," he said.
"It is just possible that in 2007, on a written basis, premium inflation for the market will have outpaced claims inflation for the first time since 2000. But, when all the results are tallied, I think that this move will be modest, and, as an earned basis lags rate movements, it won't fully flow through to the market's results until 2008."
Stevens said the company did not need to hike its premiums this year but might have to raise prices if other companies did so.
"People gravitate to the cheapest supplier very quickly, so if we got growth of more than around 12% we might have to raise prices so we could still answer the phones and deal with the demand for new premiums," he said.