When Royal Bank of Scotland floated 35 per cent of shares in insurer Direct Line (DLG) in October, demand was high. The offer was quickly oversubscribed and retail investors eventually snapped up shares worth £125m. But the success of the flotation shouldn't obscure Direct Line's weak trading prospects. The worry is that these are poor enough to wipe off the share price gains to date.
- Decent dividend prospects
- Significant cost-cutting potential
- Motor premium rates falling fast
- Uncertainty from competition probe
- Barely makes underwriting profits
- Share price boosted by technical factor
Direct Line's biggest business is motor cover, which generates 43 per cent of its gross premiums. But the UK motor market has been lossmaking for years. Accountancy firm Deloitte reckons that in 2010 in aggregate UK motor insurers generated a combined ratio of 120 per cent. In other words, they lost money - for every £100 of premium income they brought in, they paid £120 in claims. Insurers have been trying to rectify that lossmaking situation by boosting motor premium rates. According to the Office of Fair Trading (OFT), these rose 12 per cent in 2010 and 9 per cent in 2011. Such rate increases, says Deloitte, meant the sector's combined ratio had improved to a less painful 106 per cent in 2011. But fierce competition among insurers means that rates have slid since then. Price comparison site Moneysupermarket.com revealed that average UK motor rates slumped 10.6 per cent in the year to spring 2012, and that pressure looks set to persist.