Direct Line warns over rising motor claims

Direct Line said on Tuesday that average renewal premiums rose in the first quarter but warned that rising claims in its motor segment will put pressure on earnings.

Total group adjusted gross written premium income rose 8.4% during the quarter to £771.7m. The motor segment saw 3.3% growth to £358.7m, while home saw a 2.1% increase to £129m.

The company said average renewal premiums increased 19% in Q1 as it hiked prices in the motor division to improve margins. In the commercial segment, Direct Line said the "strong" premium growth seen last year continued into the first quarter, with gross written premium growth of 27.6%, driven by both direct own brands and NIG and other.

In Home, meanwhile, it highlighted "significant" price increases across the market.

The insurer said it incurred "modest" weather event claims in Q1, "well within" the 2023 full-year assumption of £80m.

However, Direct Line also said it had seen further adverse claims developments late last year and earlier this year in the motor segment, including commercial, particularly in relation to damage.

"This is expected to put pressure on earnings in 2023 including from prior-year reserve releases," it cautioned.

Acting chief executive Jon Greenwood said: "Trading has been positive over the first quarter with premium growth across Motor, Home and Commercial and this trend has continued into April.

"Our focus continues to be on restoring the capital strength of the group and improving Motor margins, where we have made good progress. Whilst 2023 earnings outlook continues to be challenging, the group has many strengths, and we continue to take the actions required to drive business performance. Our ambition over time to generate a net insurance margin of above 10% remains."

At 1550 BST, the shares were down 5.8% at 154.88p.

Matt Britzman, equity analyst at Hargreaves Lansdown, said: "The road ahead continues to look bumpy for Direct Line. 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.

"Add in claims inflation that continues to run at high single-digit levels, and the outlook for insurance profitability gets a little murky. 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."

Russ Mould, investment director at AJ Bell, said: "After a miserable 2022 which saw the insurer bombarded with claims caused by extreme weather conditions and a spike in the cost of fixing problems, Direct Line dusted off its crisis management playbook and got to work addressing its issues. A share buyback was paused, the dividend was suspended, the CEO was given the boot and it started to push up prices for insurance policies.

"Sadly, it wasn’t a simple ‘click your finger and everything is fixed’ situation. The adverse claims trend is still intact, which is going to put pressure on earnings in 2023.

"With expectations of high single-digit claims inflation across motor and home policies, Direct Line is no doubt crossing its fingers that we don’t get a hot summer that causes widespread subsidence, nor a brutally cold autumn/winter that freezes up pipes.

"All insurers want a Goldilocks scenario where the weather is not too hot or not too cold, but the impact of climate change would suggest this is a big ask."