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Direct Line emerges stronger

The consumer insurer comes out with a modest gain from the pandemic after a half of low claims
Direct Line emerges stronger

 

  • Premium levels fall through lockdowns
  • Concerns over the Financial Conduct Authority

Car insurers were one of the few companies to have genuinely benefited from the pandemic: drivers had to keep their cars insured despite the lack of opportunity to use them, while fewer overall journey’s meant fewer accident claims. Direct Line (DLG) personified this paradox better than most with an improvement in its loss ratio of 4 percentage points to 57 per cent, mainly because motor claims were half of normal levels during the second quarter.

However, what the lockdowns gave, they also took away, with overall premium levels falling, combined with a slowdown in new business. Also, the insurer couldn’t get away from its habit of booking surprise costs, with around £91.5m in one-off and restructuring charges booked through the period.  

One area of concern is how heavily, after years of complaints, the Financial Conduct Authority (FCA) is going to come down on insurers, which have allegedly made excess profits over the years by charging existing customers far higher rates for renewals than for new business underwritten in the same sales channel. The review has been consulting and a detailed breakdown of the how the new rules will be applied is expected at any time. The FCA’s investigation found that customers who repeatedly renewed with the same insurer paid £1.2bn more for their risk than they should have done (based on 2018 prices). The FCA reckons that the changes it outlines will save consumers about £4.2bn over 10 years if so-called “price walking” is effectively banned.

While Direct Line has clearly emerged in better condition from the pandemic than could have been hoped, the grounds for a significant re-rating are hard to pinpoint. Keep for income, but no more. Hold.

Last IC view: Hold, 326p, 04 Aug 2020

DIRECT LINE (DLG)   
ORD PRICE:313pMARKET VALUE:£ 4.23bn
TOUCH:313-314p12-MONTH HIGH:342pLOW: 259p
DIVIDEND YIELD:7.1%PE RATIO:12
NET ASSET VALUE:193p*COMBINED RATIO:91%
Half-year to 30 JunNet premiums (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20201.4723613.67.4
20211.4626114.57.6
% change-1+11+7+3
Ex-div:12 Aug   
Payment:03 Sep   
*Includes intangible assets of £808m, or 60p a share