ii view: Direct Line back in profit

First-half results to 30 June 

• Premiums and fees for the ongoing business up 54% to £1.84 billion
• A pre-tax profit of £61.6 million, up from a H1 loss last year of £76.3 million
• Restarted interim dividend of 2p per share (0p per share H1 2023)
• Capital cushion or solvency capital ratio to 198%, up from 188% a year ago

Guidance:

• Continuing to target at least £100 million of annualised cost savings by the end of 2025 

Chief executive Adam Winslow said: 

"In the first half of the year we delivered strong premium growth and returned to profitability. The actions we have taken are beginning to make a difference but there is more to do. 

“We will continue to drive business transformation during the second half of 2024 and into 2025, as our new high calibre management team continues to arrive.”

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ii round-up:

Insurer Direct Line Insurance Group (LSE:DLG) today reported a return to profit helped by increased premiums and management’s renewed focus on underwriting discipline. 

Premiums and fees climbed 54% year-over-year to £1.84 billion, aiding a pre-tax profit of £61.6 million compared to last year’s loss of £76.3 million and supporting the restart of an interim dividend at 2p per share.  

Shares in the FTSE 250 company fell 1% in UK trading against the backdrop of weaker markets, having come into these latest results up by around a quarter over the last year. That’s similar to fellow insurer Admiral Group (LSE:ADM) and below a 12% improvement for the FTSE 250 index. 

Direct Line brands include Churchill, Darwin, Privilege and roadside rescue Green Flag. A near one-third increase in average motoring renewal premiums helped generate a motor related operating profit of £3.1 million, up from a H1 2023 loss of £180 million. Non-motoring profit fell 30% to £61 million. 

Total in-force policy numbers fell 3% from late December to 8.95 million. Management reiterated its confidence in achieving at least £100 million in gross cost savings by the end of 2025 on an annualised run-rate basis.

A capital cushion, or solvency capital ratio of 198% was an improvement from 188% a year ago, underpinning the restart of an interim dividend payment of  2p per share. 

Broker UBS reiterated its ‘buy’ stance on the shares post the results. A third-quarter trading update is likely early November. 

ii view:

Direct Line started in 1985, was bought by Royal Bank of Scotland (NatWest Group (LSE:NWG) in 1988 and then floated on the UK stock market in late 2012. Motoring accounted for its biggest chunk of revenues in 2023 at 63%, followed by home insurance at 19%, roadside rescue and other lines such as pet insurance a further 10% and commercial related policies the balance. 

For investors, the insurer lacks the overseas exposure of FTSE 100 rival Admiral and climate change is arguably making the weather evermore unpredictable. Rival insurance providers such as Aviva (LSE:AV.) also offer business diversity given their exposure to other areas such as savings, while a forecast dividend yield below 5% compares to over 5% at Admiral. 

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To the upside, a rejected takeover approach from Belgian insurer Ageas SA/ NV (EURONEXT:AGS) made management implement plans to realise £100 million of annualised cost savings by the end of 2025. The relatively new chief executive Adam Winslow has been busy strengthening the management team. The dividend payment was previously restarted, while any further stumbles by Direct Line could see it again back under the takeover spotlight. 

For now, and while some caution still looks sensible, a new management team and consensus analyst fair value estimate above 225p means the shares could remain of interest to more speculative investors.  

Positives: 

• Strong brand names
• Restarted dividend payment   

Negatives:

• Factors outside of its control such as the weather influence performance
• Competition not standing still

The average rating of stock market analysts:

Buy