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Direct Line - price hikes continue

Direct Line reported a 68.3% rise in gross written premiums from ongoing operations, to £1.1bn. Growth

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Direct Line reported a 68.3% rise in gross written premiums from ongoing operations, to £1.1bn. Growth was largely driven by higher Motor prices, where own brand average premiums rose 37% from last year.

In-force policies rose 4.9% quarter-on-quarter, 1.3% since the end of 2022, to 9.5bn. Growth was driven by the new Motabilty partnership, which attracted around 725,000 customers. The number of own brand Motor policies fell 14% to 3.4bn.

The group's expecting claims inflation in the high single-digits for the full year, and believes it's writing new business consistent with a 10% net insurance margin.

The shares rose 3.7% in early trading.

View the latest Direct Line share price and how to deal

Our view

There's no let-up for drivers as Direct Line continues to push through higher prices. A 37% increase in the cost of average motor insurance from this time last year is mammoth, but it's been a necessary evil.

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 needs to grapple back some momentum.

Recent results have provided just that, and mark a pivot point as the cycle looks like it might finally be turning. Motor's been the division under the cosh and makes around 45% of active policies. That's enough to mean unprofitable contracts written over the past 12-18 months have weighed on recent performance.

But aggressive price hikes 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 it won't be at least until full year results that we find out. There's uncertainty, though, which adds risk and remember, no returns are guaranteed.

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. But we think other names in the sector have managed recent times a little better, and 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.

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: 7th November 2023