Interactive Investor

ii view: Direct Line premiums up but share price down sharply

9th May 2023 11:35

by Keith Bowman from interactive investor

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It had already axed its final dividend payment for 2022 and is searching for a new permanent chief executive. We assess prospects.

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First-quarter trading update to 31 March

  • Total premiums up 10% to £806 million
  • Capital cushion or solvency ratio unchanged from the 2022 year-end at 147%

Acting chief executive Jon Greenwood said: 

"Trading has been positive over the first quarter with premium growth across Motor, Home and Commercial and this trend has continued into April. Our focus continues to be on restoring the capital strength of the Group and improving Motor margins, where we have made good progress. 

"Whilst 2023 earnings outlook continues to be challenging, the Group has many strengths, and we continue to take the actions required to drive business performance.”

ii round-up:

Motoring insurer Direct Line Insurance Group (LSE:DLG) today detailed first-quarter premiums in line with City estimates but flagged further adverse motoring claims during late 2022 and early 2023, which are expected to pressure earnings. 

Total premiums for the three months to the end of March, including its home and commercial businesses, rose 10% year-over-year to £806 million, with management reiterating its focus to restore the group’s capital strength and improve margins for its motor division.  

Shares in the FTSE 250 company fell by more than 6% in UK trading, having come into this latest news down by nearly a third over the last year. That compares to a fall of under 5% for rival insurer Admiral Group (LSE:ADM) and a gain of less than 1% for the FTSE 250 index itself. 

In 2022, Direct Line suffered a pre-tax loss of £45 million compared to a profit of £446 million the year before, as it battled a combination of adverse weather-related claims and elevated motor claims inflation. This was caused by higher used car prices, longer repair times due to supply chain challenges and and an increase in the price of car parts.  

Premium increases made during the first quarter helped push motoring related premiums up 3.3% to £359 million. Home related premiums rose 2% to £129 million, breakdown premiums fell 2% to £65 million, while commercial or business-related premiums grew further, gaining 28% to £219 million.  

Direct Line’s capital cushion, or solvency ratio remained at 147%, unchanged from the level reported at the 2022 year-end and below some analyst hopes of an increase to 154%.

The insurer’s first-half results are likely to be announced early August. 

ii view:

Launched in 1985, Direct Line today employs around 9,000 people, competing against rivals such as Admiral and Aviva (LSE:AV.). Along with Direct Line itself, its other brand names include Churchill, Darwin, Green Flag and Privilege. A review of operations began before the current acting head took over, including exiting low profit margin partnership insurance such as those for packaged bank accounts. Later in 2023, the company is due to start a new 10-year partnership with Motability Operations, bringing 600,000 new customers.  

For investors, management expectations for further adverse motoring claims largely in relation to accidents and damage during late 2022 and early 2023,, plus expected pressure on earnings, are clearly disappointing. The weather seems evermore unpredictable, and regulatory changes to better balance pricing between new and existing customers have added to an already competitive pricing landscape. A push to boost its solvency ratio could also see the pending 2023 interim dividend payment reduced or even axed. 

More favourably, management actions to sharpen its performance are being taken, with average renewal premiums across its businesses rising 19% year-over-year, helping counter elevated claims inflation. A diversification of insurance types has allowed growth at its commercial business to counter some disappointment elsewhere, a new chief executive could inject renewed vigour into the group’s strategy, while its brands remain arguably strong.

On balance, and while longer-term recovery potential persists, investors may demand signs of a recovery in its capital cushion and further clarity on its dividend policy before taking any action. 

Positives: 

  • Strong brand names
  • Diversity of business type 

Negatives:

  • Factors outside of its control such as the weather influence performance
  • Tough investments markets

The average rating of stock market analysts:

Hold

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