Interactive Investor

ii view: Direct Line shares rally 15% to six-month high

Strengthening its finances and with a new chief executive to join in a few months’ time. We assess prospects.

7th September 2023 11:41

by Keith Bowman from interactive investor

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First-half results to 30 June 

  • Premiums and fees up 10% to £1.62 billion
  • Pre-tax loss of £76 million, down from a loss of £11 million last year
  • No interim dividend payment
  • Proposed business sale of £520 million boosting the capital cushion or solvency ratio by 45%

Acting chief executive Jon Greenwood said: 

"Over the last six months we have taken decisive action to put the Group back on a more stable footing. In March, we set out that our key priorities were to restore capital resilience, to improve Motor performance and to maintain the performance of our non-Motor businesses.”

ii round-up:

Direct Line Insurance Group (LSE:DLG) today talked about potentially improving profits at its core motoring insurance business due to ongoing management initiatives. It also announced a proposed £520 million business sale to boost its financial strength. 

Increased policy pricing and other underwriting actions are expected to push improved motoring profits into 2024, with the proposed sale of its commercial brokered insurance business adding 45% to its existing 147% capital cushion, or solvency ratio, and making a possible fundraising less likely. 

Shares in the FTSE 250 company rose by more than 12% in UK stock market trading having come into this latest news down by nearly a third year-to-date. That compares to a gain of over a tenth for rival insurer Admiral Group (LSE:ADM) and a fall of almost 4% for the FTSE 250 index itself. 

Direct Line detailed an increased first-half pre-tax loss of £76 million compared to a loss of £11 million last year, as it further battled elevated motoring claims inflation down to factors such as higher car part costs and longer repair times because of supply chain challenges.  

Acting chief executive Jon Greenwood declared no interim dividend payment, in line with its previous suspension, although he flagged hopes of a return to payments once performance at its core motoring business improves.  

In late August, the insurer announced the appointment of Adam Winslow as its new chief executive come January 2024. Mr Winslow joins from Aviva's (LSE:AV.) UK and Irish general insurance business and previously held positions at AIG. 

ii view:

Direct Line was started in 1985, bought by Royal Bank of Scotland (NatWest (LSE:NWG) in 1988 and then separated back out and floated on the UK stock market in late 2012. Today, along with Direct Line itself, its brands include Churchill, Darwin, Green Flag and Privilege. 

The commercial brokered insurance business that's being sold has been a part of Direct Line since 2003, with its success driven by strong and extensive partnerships with brokers, delivering tailored insurance for UK Small and Medium sized businesses. Following its sale, the insurer will be fully focused on retail personal lines and commercial small business customers. 

For investors, business previously taken on at lower prices is expected to continue hindering motoring profits into the second half. The business sale also means some diversity is being lost. A backdrop of climate change is arguably making the weather evermore unpredictable, while unlike other insurers such as Admiral and Aviva, there's currently no dividend. 

On the upside, the proposed business sale will significantly boost Direct Line's financial strength, and management is taking action to sharpen performance. The new chief executive may inject renewed vigour back into its strategy, while hopes for a return to dividend payments remain. 

For now, and while risks clearly persist, strong brand names and an analyst consensus estimate of fair value at over 190p per share ahead of the latest news, arguably offer speculative investors something for both the short and longer-term. 

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:

Strong hold

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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