Direct Line Insurance Group plc (DLG) Ordinary Shares 10.9090909p

In a statement after market close on Friday 22 March, Belgian insurer Ageas said that it did not intend to make an improved offer to buy Direct Line Group. Two previous proposals had been rejected by Direct Line, with the board feeling the offers significantly undervalued its future prospects.

The shares fell 12.5% in early trading.

Full-year results (21 March 2024)

Direct Line Group reported full-year results and saw a 27.1% rise in gross written premiums and associate fees to £3.1bn, largely driven by price hikes. The group’s net insurance margin was -8.3% and there was an operating loss of £189.5mn. This was entirely driven by the Motor division losses, which were partly offset by profit in other areas.

In-force policies were broadly flat at 9.4mn, despite losing 383,000 own-brand motor customers.

The solvency capital ratio (a measure of balance sheet strength) improved to 201%, benefiting from the sale of its brokered commercial business. The board has proposed a dividend of 4p per share but has warned it should not be seen as a return to regular dividends.

New targets are in place, with the aim of delivering a net insurance margin of 13% in 2026 and £100mn in cost cuts by the end of 2025.

Our view

Direct Line’s story has been dominated by takeover talk in recent weeks. But a fairytale ending looks out of reach after Ageas confirmed it would not be making a firm offer. Direct Line had previously rejected a couple of proposed deals and Ageas couldn’t make the numbers work to put a more enticing number on the table.

And so, back to reality. Full-year results painted a better picture than we’ve had for some time. But there’s a long way to go before this turnaround is complete. It’s no secret Direct Line has struggled over the past few years to deal with a challenging motor insurance market. Given Motor makes up close to half of all active policies, the unprofitable contracts written over the past 12-18 months have weighed on recent performance.

But aggressive price hikes have finally caught up with inflated costs. New policies are being written at levels in line with a net insurance margin of above 10% - back in the land of profit. But Direct Line was slower to raise prices than the wider market which means it’ll take longer to feel the benefits than peers.

With a new CEO and an improving market, the Motor business looks to finally have a footing from which it can grow profitable business.

Aside from Motor, performance across other business lines has been pretty good. Home insurance is a big part of the operation and remains profitable despite an uptick in claims inflation. Price hikes are again being called on, leading to a drop in customers - not just in Home but in Motor too. That's part of the strategy though, margins are being prioritised over volumes in the current climate and is something we can get behind for now.

With the sale of its brokered commercial insurance business, NIG, capital levels are stable again. Management has taken the mix of stable capital and improving Motor business as a signal to offer up a final dividend. It has however been clear that this should not be seen as a full reinstatement of a regular dividend. Investors should be prepared to see this taken away down the line should things falter. Nothing is guaranteed.

There’s still a long way to go if Direct Line wants to return a stable dividend and restore investor confidence. With takeover frenzy now backed out of the valuation, it looks like a more reasonable entry point. But we still prefer other names in the sector with less work to do.

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