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Direct Line Group - Easing conditions continue to support growth

George Salmon | 3 May 2017 | A A A
Direct Line Group - Easing conditions continue to support growth

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Direct Line Insurance Group plc Ordinary

Sell: 216.50 | Buy: 216.60 | Change 0.10 (0.05%)
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Gross written premiums from Direct Line's ongoing operations were up 4.2% on a year previously, driven by a strong performance from the group's own brand motor policies.

The shares were broadly unmoved following the announcement.

Our View

Highly competitive with broadly generic products; few companies can maintain any semblance of pricing power in personal insurance. 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 hasn't helped.

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

Indeed, the whole industry is enjoying a bit of a let up in pricing pressure at the moment. DLG are benefitting, and conditions are looking pretty balmy at the moment - with both pricing and in-force policies moving the right direction.

As the market leader, DLG also enjoys access to more information on claims and customer behaviour than competitors, helping the Group to price more accurately, while scale provides opportunities for cost cutting.

Direct Line has said it will be targeting a Solvency capital range of 140%-180% going forwards. Having reported a Solvency II ratio of 165% in 2016, the group decided not to pay a special dividend. Combined with the decision to pay any special dividends on an annual basis, this suggests management may be taking a more cautious approach to regulatory capital. That would have a negative impact on shareholder returns, although analysts are still forecasting a prospective yield of 6.5% for 2017.

Nonetheless, 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.

First Quarter Results

Own brand motor premiums written in the quarter were up 11.2%, with in-force policies up 6%. Average written premiums across Motor were up 6.6%, with risk-adjusted priced increasing "significantly more than that" putting it comfortably ahead of the current rate of claims inflation.

The strong motor performance more than offset weakness in Home insurance, where claims inflation continues to increase above Direct Line's long term expectations. Direct Line has responded with price increases that have resulted in lower new business volumes in Q1, although the group says

Commercial delivered a good performance, with pricing increases keeping pace with inflation and in-force policies up 5.1%. Rescue premium grew 3.3%, driven by a strong performance from the Green Flag brand.

Direct Line continues to target a combined operating ratio of 93-95%, a key measure of underwriting performance, and remains on track to deliver a 2.4% yield from its investment portfolio in 2017.

The group's Solvency II capital coverage ratio is expected to be unchanged at 165%.

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.