Direct Line premiums remain strong, warns impairment may increase

Direct Line issued a mixed update for the first nine months of the year, in which it warned that the impairment charge in 2017 could exceed that incurred last year.

The motor and home insurer reiterated its guidance for a combined ratio in the middle of the 93-95% range for the full year, with medium term targets unchanged.

Gross written premium in the third quarter of the year grew 2.8% to £907.2m, with own brands contributed 8.3% growth to compensate for weaker partnership business.

For the first nine months of the year, gross premium has increase 4%, with motor up 9%, home insurance down 4% and commercial up 2%.

But the group warned that the impairment charge at year end may be "somewhat higher than last year's" as a decision to rework some elements of its original capital expenditure plan.

The investment is being aimed at ensuring improvements to customer experience, supporting growth and efficiency.

Upsides for the quarter included motor insurance, where own brands in-force policies increased by around 200,000 or 5.5% and premiums grew 10.0% compared to the third quarter last year.

Trading continued to be strong and good retention rates were maintained on renewal business while there were some signs new business rate increases slowed in the market.

On motor claims, damage severity remained at elevated levels, while frequency so far this year has been better than expected, although it is too early to call this a trend.

Chief executive Paul Geddes felt the quarter continued the good momentum from the first half and kept the group on track with full year targets.

With in-force policies growing by 5.1% over the last 12 months in direct own brands, across motor, home, Green Flag and Direct Line for Business this demonstrated the strength of the Direct Line Group business model, he said.

"Our Motor, Commercial and Rescue businesses continued to trade well in the quarter while the actions we've taken on Home claims costs have started to take effect. We remain focused on our target loss ratios with our strong customer relationships, propositions and trading capabilities differentiating us in the competitive marketplace."

Direct Line shares were down 0.8% at 364.2p by 0930 GMT on Tuesday.

As a results of a possibly higher impairment, broker Shore Capital kept its overall forecasts unchanged, with the full year outcome subject, as ever, to weather events in the fourth quarter.

"With the likely reversal of the Ogden discount rate changes expected to impact motor premium rates and escape of water claims still hitting the household book, we remain concerned over the sustainability of profits in the personal lines area," said analyst Eamonn Flanagan.

"We also believe that the group’s ancillary/instalment income, at circa 20% of H1 17 profits, remain under threat of regulatory pressure. "