ii view: Direct Line premiums fall and so does the share price

Staying confident and offering an estimated future dividend yield of around 9%, but with shares at lowest since 2013. We assess prospects. 

First-quarter trading update to 31 March

• Total written premiums down 2.4% to £734.3 million
• Motoring written premiums down 5.4% to £347.3 million

Guidance:

• Reaffirmed expectation to achieve a combined operating ratio of between 93% to 95%

Chief executive Penny James said:

"In an important quarter for Motor and Home markets, prices adjusted for the introduction of the FCA Pricing Practices review, but we believe have not fully reflected claims inflation. Trading was broadly in line with our expectations.

"Looking forward, we are focused on driving benefits from our new Motor platform and continue to deliver significant new pricing capability, including machine learning models, with more to come through the rest of the year.”

ii round-up:

Insurance company Direct Line Insurance Group (LSE:DLG) today reported a fall in overall premiums received as it flagged concern that the cost of insurance across the industry was not keeping up with claims related inflation.  

Under the Financial Conduct Authority’s (FCA) new pricing practices made to ensure fair value to both existing and new customers, total written premiums fell by 2.4% to £734.3 million, with premiums for its biggest category motoring down 5.4% to £347.3 million. That proved below City expectations, although the FTSE 250 insurer offered some reassurance regarding profitability as it reiterated its 2022 expectation for its combined operating ratio to be between 93% to 95%. Under 100% means that the insurer has earned more in premiums than it pays out in claims.

Direct Line shares fell by more than 6% in UK trading, leaving them down around 15% year-to-date. Shares for sector giant Admiral (LSE:ADM) are down by just over a fifth during 2022, but home repairs insurer Homeserve (LSE:HSV), which is the subject of a takeover bid, is up nearly 10%. 

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Home insurance premiums for Direct Line during the quarter fell by almost 10% to £126.4 million, although that was countered by an 11.6% increase in commercial related premiums to £172 million. 

Motor claims severity inflation remained high, and elevated used car prices continued to impact, pushing total losses and theft claims, while supply chain disruption further increased repair cycle times. 

Weather costs from storms Dudley, Eunice and Franklin hitting its home and commercial categories are expected to be around £40 million. That’s up from managements previous estimate of between £30 million to £40 million. 

First-half results are scheduled for 2 August. 

ii view:

Launched in 1985, Direct Line today offers UK insurance policies both online and over the telephone to cover a variety of assets and events. Its original motoring insurance still generates its biggest slug of premiums at just half of the overall total. Along with Direct Line, its other brands include Churchill, Darwin, Green Flag and Privilege.

Under chief executive Penny James, the UK insurer has placed data and technology at the top of its agenda. Its claims capabilities continue to be expanded given its now 20-plus auto services repair centres, supporting its competitive position in vehicle repairs. 

For investors, changes under the FCA’s pricing review, effectively banning companies from raising the premiums of loyal customers, are now playing out. At the same time, claims inflation remains a challenge, while events outside of management’s control like the weather can never be forgotten. 

More favourably, a focus on profitability persists, with its core 2022 and medium-term efficiency target reiterated. A diversified business model exists, investments in technology have been made and costs cuts include the 2021 reduction in its property portfolio. For now, and while some caution looks sensible, an estimated future dividend yield of around 9% is likely to keep income orientated investors interested. 

Positives: 

• Diverse product offering 
• Attractive dividend payment (not guaranteed)

Negatives:

• Factors outside of its control such as the weather influence performance
• Forecast dividend cover of 1.1 times

The average rating of stock market analysts:

Buy