ii view: dividend stock Direct Line battles claims inflation

Shares for this high yielding FTSE 250 insurer are down by more than a quarter year-to-date. We assess prospects. 

Third-quarter trading update

• Adjusted gross written premiums down 6% to £807 million

Guidance:

• Expects full-year combined operating ratio to be around 98% or moderately above, up from 96% to 98%

ii round-up:

Insurance company Direct Line Insurance Group (LSE:DLG) today detailed a decline in gross written premiums as it continued to battle challenging conditions for both its motor and home divisions. 

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Third-quarter premiums to the end of September fell by 6% to £807 million, below City forecasts, hit by the need to increase prices as it moved to restore profit margins given the impact of elevated inflation on claims and claims assumptions.  

Direct Line shares fell by more than 4% in UK trading, having come into this latest update already down by more than a quarter year-to-date. Shares for insurance sector giant Admiral Group (LSE:ADM) have fallen by more than a third in 2022, while the FTSE 250 index is down by over a fifth.  

Higher used car prices, longer repair times given supply chain challenges and inflation in the cost of car parts have all proved factors across the industry in pushing up claims inflation. Motor inflation at Direct Line is tracking close to its forecast of around 10% for 2022. 

Given rising interest rates and global bond market volatility, moves to reduce its investment portfolio risk have been made. Ongoing initiatives to improve the insurer’s efficiency and lower operating costs also continue to leave its expectations for dividend paying capacity unchanged.

Full-year results are scheduled for 7 March.  

ii view:

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

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For investors, the headwind of claims inflation and rising premiums in a highly competitive marketplace continues to be seen. A buffeting of its investment portfolio warrants consideration given changing interest rates. So do events outside of management’s control like the weather on its key home insurance segment, while forecast dividend cover of under one and below the three-year average of 2.2 times is also noteworthy.  

More favourably, actions to help counter rising claims inflation are being taken. A diversity of insurances is offered, with growth in its commercial segment helping to offset falls elsewhere, while a focus on data and technology continues to be made.  

Some caution looks sensible here, and investors must decide whether to place faith in the dividend paying capabilities of the business, against how much of the bad news is already priced in. Investors will also want evidence of an improvement in the claims environment and UK motor market.

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 0.9 times

The average rating of stock market analysts:

Buy