Direct Line reported a 9.8% rise in gross written premium and associate fees to £1.6bn. Price hikes in Motor and good performance from Commercial more than offset a 3.2% drop in active policies.
Net insurance margin dropped from 11.3% to negative 6.4%, and there was an operating loss of £78.3m, as unprofitable Motor business written last year and high claims inflation have continued to impact results. As recent price hikes kick in, new Motor policies are being written at what look to be profitable levels.
The group's solvency ratio, which measures capital levels compared to requirements, was steady at 147%. That's expected to move around 45 percentage points higher on completion of the sale of NIG, the brokered commercial insurance business, which was announced alongside today's results.
Adam Winslow will be appointed CEO, starting in the first quarter of 2024.
Operating profit in 2023 is expected to be impacted by claims inflation and previously written Motor contracts. The benefits of more favourable pricing are expected to support improvement into 2024. The dividend remains off the table for now.
The shares rose 13.2% in early trading.
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Our view
As reporting season for the UK's largest insurers comes to an end, cautious optimism seems an apt way to describe sentiment amongst management teams and Direct Line has continued that trend. It's been tough recently; claims numbers have been running high, while cost inflation means underwriting profitability has been under serious pressure. Add headlines and charges around overcharging customers, and here lies a business that seriously needed some good news.
Half-year results provided just that and may mark a pivot point as the cycle looks like it might finally be turning. Motor's been the division under the cosh and makes up almost 40% of active policies. That's enough to mean unprofitable contracts written over the past 12-18 months have weighed on performance.
But things are starting to turn. Aggressive price hikes, 28% for Motor contracts, are ahead of the broader market and look to have finally caught up with inflated costs. That means policies written today look to be at levels in line with a net insurance margin of around 10% - back in the land of profit. One key thing to remember is that insurance profits are realised over the life of the policy. That means 2023 will still have unprofitable policies to roll through. It probably won't be until 2024 that we start to see the benefits of better-priced policies feed down to the profit line.
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.
Alongside results came the announcement that the group intends to sell its brokered commercial insurance business, NIG. It's been a strong performer, so the logic behind the sale is strategic rather than forced. One key advantage will be rebuilding the capital buffer, which was a little low.
We would urge caution on the forward dividend yield; restoring the dividend requires the NIG deal to go through, and continued signs of improving Motor profitability. Both look more likely than not, but even so, we'd expect early 2024 to be the earliest management start talking dividends again. There's uncertainty, though, which adds risk and remember, no returns are guaranteed.
We think other names in the sector have managed recent times a little better. But all in, the picture looks better than it has for some time and at current valuations, there's plenty of scope for re-rating should conditions play out favourably. Investors should prepare for the rest of the year to be challenging.
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.
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