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Direct Line Group - Motor insurance pricing continues to improve

Equity research team | 8 November 2016 | A A A
Direct Line Group - Motor insurance pricing continues to improve

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Direct Line Insurance Group plc Ordinary

Sell: 216.90 | Buy: 217.10 | Change 0.60 (0.28%)
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Motor insurance pricing continues to improve

Third quarter in-force policies remained flat on the half year, declining slightly year on year. However, improving pricing in motor, up 10%, saw gross written premium increase 4.5% compared to Q315.

The shares rose slightly following morning trades, up 0.7%.

Our View

Personal insurance is a tough industry.

Highly competitive with broadly generic products; few companies can maintain any semblance of pricing power. That tends to drive combined operating ratios (the percentage of premiums that are paid out as claims or expenses) closer to 100% as companies are forced to attract customers through cutting their prices. The advent of price comparison websites has not helped.

Fortunately for Direct Line (DLG), the strength of the Direct Line brand means that it is able to bypass price comparison sites altogether, while also supporting high levels of customer retention. That has helped support pricing, keeping margins strong.

As the market leader DLG enjoys access to more information on claims and customer behaviour than competitors, helping the Group to price more accurately. Scale also provides opportunities for cost cutting (we're impressed that Direct Line can reduce its costs sufficiently to partially absorb the £24m Flood Re levy).

The group has said that it will be targeting a Solvency range of 140%-180% under the new model. Dividends announced at the half year took the group to 184%, suggesting potential for further returns to shareholders if the board think there is surplus capital in the business. Analysts are currently forecasting a prospective yield of 7% for 2017.

Direct Line is delivering a respectable underwriting performance in a challenging and highly competitive sector. If it can maintain its brand position, and resulting price advantage, then the group should continue to generate strong returns on equity, though of course there are no guarantees.

Third Quarter Results:

Improving motor pricing saw gross written policies hit £883m in Q3, up £38.4m on the previous quarter. Meanwhile total costs in the were 3.3% lower than a year earlier, with full year 'business as usual' costs expected to be no higher than 2015.

The group's combined operating ratio, a key measure of underwriting performance for insurers, is expected to be at the lower end of the 93%-95% target range.

Motor - 49% of gross written premium: In force motor policies rose 4% versus a year earlier, with own brand more than offsetting a decline in partnership policies. Risk adjusted pricing increased 10%, with claims inflation within the anticipated 3-5% level.

Home - 26% of gross written premium: Growth in own brand policies was not enough to offset a 5% decline in partnership policies year-on-year. Pricing improved slightly, up 0.6%, improving from declines in Q1 and Q2.

Rescue and other personal - 12% of gross written premium: In-force policies fell 6.2% versus a year earlier, primarily as a result of lower packaged bank account volumes. Other lines saw gross written premium increase 2.2%, boosted by growth in Travel.

Commercial - 13% of gross written premium: The number of commercial policies rose 2.9% versus Q316, driven by a strong performance in Commercial direct. This in turn supported an increase in gross written premium of 2.8%.

Unless otherwise stated, all estimated figures, including prospective dividend yields, are taken from a consensus of analyst forecasts compiled by Thomson Reuters. These estimates should not be taken as a reliable indicator of future performance.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.