Direct Line shares surge on 25% price hike, commercial lines sale

The news came as the home and motor insurer saw half-year losses widen as inflation continued to push up the cost of motor claims.

Pre-tax losses increased from £11.1m to £76.3m, while operating profits swung to a loss of £78.3m from a £197m profit last year. Direct Line earlier this year axed its dividend which triggered the departure of chief executive Penny James.

On Wednesday, Canadian property and casualty insurer Intact Financial said it was buying Direct Line's brokered commercial lines operations for £520m to expand its UK unit RSA. Analysts at Citi said the deal removed the risk of an equity raising.

High inflation, supply chain issues following the Covid-19 pandemic and the war in Ukraine have pushed up the costs of motor repairs adversely and hitting margins for insurers.

"Our primary focus in motor for the first half of the year has been to improve margins by ensuring our pricing reflects latest claims inflation whilst, at the same time, launching new cost-effective products for customers. We have made good progress and believe we are now underwriting at levels consistent with our ambition of a net insurance margin above 10%, Direct Line said.

'SIGNIFICANT' RENEWAL PREMIUMS

It had introduced "significant" rate increases over the first half of 2023, driving a 25% increase in renewal average premiums, taken targeted action on its underwriting footprint, and looked for opportunities to mitigate claims inflation including expanding the company's own managed repair network.

"The outlook for motor claims inflation remains in line with our assumption of high single digits, however the opportunity for prior-year reserve releases in the short-term remains low given this inflationary backdrop," it added.

"Looking forward, the improved motor margins now being achieved should provide a platform to support an improvement in operating profit into 2024."

This comes as the company conducts two reviews into underpaying motor claims and overcharging existing customers for renewals. In July the Financial Conduct Authority ordered Direct Line to go back through five years of claims after admitting it had underpaid some customers who had their cars and vans written off.

Only last Monday, the FCA revealed it had stepped in and forced the company to repay customers it had overcharged. Direct Line said it had put aside £70m to rectify both matters.

Matt Britzman, equity analyst at Hargreaves Lansdown, said the results "could just mark a pivot point as the cycle looks like it might finally be turning, with price hikes catching up to claims inflation".

"Average renewal premiums are running 25% higher, meaning Motor insurance written now is back at profitable levels. That will not be a pretty sight for drivers, with financial pressures mounting from all angles.," he said.

"Direct Line has lost some customers, likely due to shopping around for better deals, but prices across the market are rising rapidly, so there’s not much let-up wherever they turn."

"Investors can look at today’s results with a sense that conditions are turning. The announced sale of Direct Line’s brokered commercial insurance business will free up some capital. But until Motor insurance shows signs of consistent profitability again, don’t expect the dividend to be back on the table.”

Reporting by Frank Prenesti for Sharecast.com