This week’s trading statement from Quindell (LSE: QPP) suggests that the firm is making good progress on resolving its most obvious and dangerous problem: poor cash collection.
However, a recent House of Commons Transport Committee report on motor insurance highlighted another risk, which I believe could seriously damage Quindell’s reported 43% profit margin.
Here’s the problem
The majority of Quindell’s profits appear to come from its legal services business, which mostly handles compensation claims.
Until recently, most of these have been for personal injury following a road accident, and many were for whiplash. This is an area that has come under increasing regulatory scrutiny, due to a high incidence of fraudulent claims.
To address this, the government is planning new measures, which I believe could impact on Quindell’s business.
Is integration the answer?
Part of Quindell’s business model involves the integration of previously separate functions, such as medical reporting and legal services.
According to the Transport Committee report, the government is planning to establish independent panels to provide medical reports for whiplash claims by next Easter, to ensure that “medical examiners … are not paid by those who favour a certain outcome in their diagnosis”.
I’m not suggesting that Quindell’s medical staff are anything less than professional, but the Quindell’s medical arm clearly has an interest in establishing claims of whiplash, even though, according to the committee’s report, ‘there is no generally accepted objective test for a whiplash injury’.
What’s next?
My concern is that Quindell’s current high profits may not be sustainable: perhaps coincidentally, the firm is currently diversifying its legal services business into the area of industrial hearing loss claims. These take the form of compensation claims against employers’ liability insurance policies.
In its latest investor presentation, Quindell claims that “almost all” hearing loss cases fall outside the Ministry of Justice’s claims portal, meaning that solicitors fees are uncapped, rather than being limited to £800.
Quindell then goes on to say that its average legal services revenue for each hearing loss case is between £9,000 and £9,500, out of which the ‘client deduction’ — presumably the portion of the compensation payout the claimant receives — is under £2,000.
Signs are emerging that industrial hearing loss could be ‘the next whiplash’ — a gravy train for no-win, no-fee solicitors, who seek out potential claimants on the basis that they have nothing to lose.
I’m not suggesting Quindell is anything less than perfectly ethical, but this kind of business seems fraught with regulatory risk, in my view, and I think there are better growth opportunities elsewhere.