Complaints on the web suggested trouble at the mid-cap.
Now here's a lesson on investment, courtesy of a Hallowe'en horror of a statement... and discussion-board rants from unhappy customers.
Homeserve (LSE: HSV), the FTSE 250 business that markets policies covering blocked drains, burst pipes and other domestic emergencies, watched its shares slump 33% this morning after suspending all of its telephone sales and marketing activity. An independent investigation looks to have discovered the possible mis-selling of policies, and the Financial Services Authority has become involved.
On the face of it, then, pretty dire news, and no doubt call-centre retraining costs and compensation claims are racking up straight away. Although Homeserve confirmed current-year profits remain on track, the fact new policies can't be sold over the phone until the retraining is complete -- plus the collateral damage to the firm's brand and reputation -- must surely cause some sort of financial impact.
3 weeks without hot water!
The harsh share-price reaction might suggest today's news came out of the blue, yet a quick online search for "homeserve complaints" reveals no shortage of customer anecdotes. A possible sign of today's news was this dubious sales pitch from last year: "Just to alert folks that Homeserve [is], in my opinion, trying a novel way of drumming up business with a scare tactic for water supply pipe bursts."
In terms of call-outs, service and general customer care, my cursory web search does not put Homeserve in a very good light. Rants include this one: "3 weeks without hot water and this is supposed to be an emergency cover!! Homeserve constantly trying to get out having to pay for the claim."
...and this one: "I want to highlight what I believe to be extremely underhanded tactics by Homeserve domestic insurance (plumbing, electrical, etc)."
Now we can always find complaints about major firms on the web, but I get the feeling there are a lot of people extremely unhappy with Homeserve.
I thought this was a quality share!
Until today, Homeserve enjoyed a reputation for reliability -- at least for investors such as me, who have no first-hand experience of the firm. Burst pipes and broken boilers should occur whatever happens to the financial markets, and the firm's renewal rates have -- historically at least -- been very attractive at 80% or so.
Indeed, Homeserve's 'peace of mind' policies helped it become a notable winner during the recession. The 2011 annual report showcases profits doubling to £104m between 2007 and 2011, aided in part by expansion into Spain and America. Margins at the core UK operation were a wonderful 29%, too, which suggested to me the group enjoyed limited competition.
But now I'm wondering whether Homeserve's impressive growth was all a result of an over-aggressive sales process, and those lucrative margins have simply been a by-product of unsatisfactory claim payouts. To be honest, I can't be really sure.
Anyway, as an investor looking to make long-term money in quality outfits, I need to know the companies I'm backing are treating customers fairly. And in this day and age, that means double-checking the web for views from those at the sharp end. I certainly never knew the depth of ill-feeling towards Homeserve before today, and it seems many Homeserve investors didn't know either.
More on the markets, shares and the economy:
Don't miss our latest free report -- 3 Shares The Motley Fool Owns, And You Should Too
