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Direct Line - higher Motor claims keep pressure on earnings

Direct Line has reported first-quarter underlying gross written premium growth of 9.7%, to £805.7m.

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Direct Line has reported first-quarter underlying gross written premium growth of 9.7%, to £805.7m. That reflected growth across Motor, Home and Commerical.

The number of in-force policies from ongoing business fell 1.6% to 9.5m since the start of the quarter. Pricing actions in Motor to help improve margins had a negative impact on client numbers.

Weather-related claims over the quarter were within full-year assumptions of £80m. However, claims in Motor continue to be a challenge, expected to weigh on earnings this year. Claims inflation is still likely to run at high single-digit levels across Motor and Home.

The shares fell 6.6% in early trading.

View the latest Direct Line share price and how to deal

Our view

The road ahead continues to look bumpy for Direct Line. It's a challenging situation for a new, unappointed CEO to come in and pick up.

The final dividend was given the chop back in January, despite prior assurances that it was secure. This is a perfect reminder that returns are never guaranteed. The road to restoring the dividend looks long and uncertain, so we're not optimistic the prospective 8.5% dividend yield will fully materialise.

Just as weather-related claims ease back to more normal levels, there's little in the way of a let-off for the Motor division as damage-related claims tick higher. When we add in the rising costs of covering insurance claims, profitability comes under pressure. An insurer's combined operation ratio measures the percentage of premiums that are paid out as claims or expenses. This came in above 100% for 2022, in loss-making territory.

The Motor division accounts for around 45% of the Group's written premiums, so improvement in this area will be key to driving a recovery in the financial performance. There was positive news on the pricing front, especially in Motor, where planned rate hikes fed through to higher gross premiums. There'll likely be more pricing action over the year as Direct Line looks to plump up margins in Motor.

Personal insurance remains highly competitive, and with rivals offering pretty generic products, few companies can maintain any semblance of pricing power. That has tended to have negative consequences for combined operating ratios as companies are forced to cut prices to attract customers. Price comparison websites have only exacerbated the problem.

One of Direct Line's key advantages is its brand. This has helped it price more aggressively than competitors in the past and also secure a relatively high proportion of direct sales (without selling through price comparison sites). The second is scale, because the new, leaner cost base can be spread across more policies. New technology infrastructure helps the Group compete on price comparison sites and is expected to improve underwriting accuracy.

All-in-all, the challenges outweigh progress at the moment. And even with recent efforts to bolster its position, the Group's important solvency ratio is lower than we'd like to see, and improvements seen earlier in the year look to have been somewhat unwound.

Turning the ship around certainly won't be an easy task or a quick fix. There's also a lot riding on the new technology investments living up to their billing. The current challenges are reflected in a below-average price to earnings ratio, which looks appropriate in our view.

Direct Line Group key facts

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.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. 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 disclosure for more information.

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Written by
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 9th May 2023