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Direct Line - premiums slow down

William Ryder, Equity Analyst | 5 May 2021 | A A A
Direct Line - premiums slow down

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Direct Line Insurance Group plc Ordinary

Sell: 215.80 | Buy: 216.10 | Change -0.50 (-0.23%)
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Direct line's first quarter gross written premiums fell 4.7% year-on-year to £752.3m. Of which, £521.3m were for own-brand policies, down 5.5%. In force policies fell 0.6% to 14.5m, and own-brand policies fell 0.2% to 7.4m.

Direct Line reiterated guidance for a combined operating ratio (the percentage of premiums payed out in claims and costs) of 93-95%, normalised for weather. The group is on track for over half of profits to come from policies written this year.

The shares were broadly flat in early trading.

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Our view

The impact of coronavirus has been felt unevenly across Direct Line's business, as reduced motor claims have partially offset higher costs and claims in areas like travel. The dividend was temporarily suspended, but is now back and the group has launched a share buyback to return excess capital to investors.

In the longer term very little has really changed for Direct Line. Personal insurance remains highly competitive, and with rivals offering pretty generic products, few companies can maintain any semblance of pricing power. We can already see the impact in the motor division where average prices have been cut by 5% to remain competitive. That has tended to have negative consequences for combined operating ratios (the percentage of premiums that are paid out as claims or expenses) as companies are forced to cut prices to attract customers. Price comparison websites have only exacerbated the problem.

Insurers must set aside a portion of the premiums they receive to meet future claims, called reserves. But, if claims turn out to be lower than expected or the rules around how much must be set aside change, the excess can be released as profit. In recent years profits have been flattered by the release of prior years' reserves.

That's unsustainable in the long run, so CEO Penny James has firmly focused on cutting costs, capitalising on recent investments in technology and increasing the contribution of current year underwriting. That could prove easier said than done though, as better underwriting often means higher prices, which would make growth a challenge. COVID-19 may have upset the timing slightly, but we expect the same basic ideas to stick.

Direct Line does have a few key advantages. The first is the brand, which has helped it price more aggressively than competitors and also secure a relatively high proportion of direct sales (without selling though price comparison sites). The second is scale, because the new, leaner cost base can be spread across more policies. In time the new technology infrastructure should help the group compete on price comparison sites, and may improve underwriting accuracy for the direct brands.

Overall, we think Direct Line's targets are ambitious but not unachievable - although a lot's riding on the new technology investments living up to their billing.

Direct Line Group key facts

  • 12m forward Price/Earnings ratio: 11.4
  • Average 12m forward Price/Earnings ratio since listing (2012): 11.2
  • Prospective yield: 8.7%

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Q1 Trading Update

Motor premiums fell 10.6% to £367.3m, reflecting a deflationary pricing environment due to reduced claims, fewer new car sales and fewer new drivers. Direct Line reduced average prices by 5%, which was less than the overall market.

Home premiums rose 1.8% to £140.3m, reflecting from the Churchill and Direct Line brands, partially offset by lower partnership sales. The division incurred £3m of major weather related claims during the quarter, which management described as "benign".

Green Flag Rescue and Other Personal Lines premiums fell 16.3% to £90.7m. This was primarily due to lower travel sales, although Green Flag premiums fell 1.5% to £19.4m thanks to reduced shopping.

Commercial premiums rose 16.1% to £154.0m, driven by a 15.3% increase in sales to small and medium sized businesses. This performance was supported by a strong result from the Churchill brand and NIG.

Direct Line has continued to roll out its Motor platform and is now realising the benefits. The group has added a 22nd auto services repair centre and the new brand, Darwin, continues to perform well.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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.